The Dividend Cafe - The DC Today - Wednesday, January 11, 2023

Episode Date: January 11, 2023

Dow: +269 points (+0.81%) S&P: +1.28% Nasdaq: +1.76% 10-Year Treasury Yield: 3.54% (-7.6 basis points) Top-performing sector: Real Estate (+3.60%) Bottom-performing sector: Consumer Staples (+0.06%) WTI Crude Oil: $77.71/barrel (+3.45%) ASK DAVID “The US government has stated that it will purchase crude oil to replenish the strategic reserve once the price hits $70. In effect, this seems to indicate that the government will purchase millions of barrels at $70. Does this function as a price floor? And, if so, what impact does a government-created price floor have on markets?” ~ Keith So just by way of clarification, they have indicated they want that to be the rough price level at which they will transact, but their rough and very ambiguous guidance on the subject would indicate the intent of more a floor than a ceiling and yet, if the price does not go (or stay) there, it may not be a price at which much transacts. The government cannot make the market cooperate. But to the extent the market expects that level to be a rough “floor,” I suppose one could assume in their economic calculation that some of the left tail risks of various price collapses are less likely. The problem is that they can change their mind, and any number of events could happen (upside or downside) that alter the economics here. What market actors ultimately know is that there is a forced buyer in the marketplace, and supply calculations, profit expectations, and a number of numerical considerations around production can be performed with that intervening fact lingering. It does suggest a certain backstop in matters which provide a bit of an asymmetrical risk/reward (in the producers’ favor). 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, welcome to the Wednesday DC Today. I am excited to give you a quick summary, but I do have to say that some of this feels a little bit like deja vu. We had a good update in the market. You know, we had a massive update in the market Friday, and then we've kind of moved along this week, and everything's kind of going all right, and it's been a little down, and then there was a couple good ups in the big up Friday, and net, net. You know, when you go back to it, it's really quite positive. Today we were up another 269 points. And I think a lot of this is an expectation that tomorrow's CPI number is going to be bad.

And I think it's going to be bad. And even if I didn't think it was going to be bad, by the way, when I say bad, I mean lower. I'm sorry. So that's good. That's what people want. Lower CPI, that would be good. Okay. That's what I should have said.

But here's the thing. I very much believe that in terms of throughout the course of the year. But it very much feels to me like there's a lot of traders piling on the long side of that. like there's a lot of traders piling on the long side of that. In other words, believing that that will be the data, that there will be good CPI reduction. And first of all, the deja vu is that that's happened in advance of a CPI number the last couple of months. And then there was something about the number that disappointed and you got an opposite response after the announcement.

There was a month, I don't remember off the top of my head which month it was, but there was a month. And I want to say that it may have been August. It could have been October. Oh, geez. I usually can think of this right away. It doesn't matter right now. My point is that there was a number in which things were softer than expected. And then that did cause a market that had been selling off in advance of the number to rally afterwards. Then there's other months where it rallied in advance and softened afterwards. I don't know if the number ends up upside surprising, meaning the CPI is a little higher than expected. So that would lead to a sell-off or, or, uh, buy the rumor, sell the news type of deal where the number does come in soft.

And yet you just have had so much front loading around that than, in fact, front running around it. People trying to trade in advance of it that they immediately take those trades off and it pushes markets the other way. So we'll see. I wouldn't be surprised if you have a lot of volatility tomorrow on Thursday. I wouldn't be surprised if you even have correction tomorrow to the downside. But, you know, I'm not in the business of predicting those things. I not only have no idea, I have no care in the world. I mean, I literally couldn't care less than I do. I'm just more sharing it kind of anecdotally that there is something about this buildup that, on one hand, a lot of people are saying, oh, well, the markets must know that CPI is coming in weak.

Yeah, but they were wrong about that a couple of times in recent months as well. That's all I'm trying to say. Okay, so let me just kind of get into the numbers real quick. Dow up 269, up 0.81%. The S&P was up 1.28. NASDAQ up 1.76. So again, most of this rally recently has been kind of an inverse

where you're having a good rally in junk and a good rally in lower quality. Although one of the sectors that has had a bit of a struggle this year, that it was up 3.6% today was real estate. The bottom performing sector once again was consumer staples, although today it was positive by the whopping amount of six basis points. But again, one of those days where all 11 sectors of the S&P were up. And when you do see things like consumer staples or utilities, health care is often in this camp at the lower end of positive performance. That's to be expected when you're having a more broad rally that is not so much focused around defensives. The bond market today rallied again, kind of rallied up what it had given back over the last day or so. The 10-year was down 7.5 basis points, closing at a mere 3.5%.

Oil then, I got the headline report from EIA, the Energy Information Administration, of a 19 million barrel buildup in inventories. I expected you'd see another sell-off, and oil rallied 3.5%. And I think that, first of all, some of the drawdowns in inventory, some of the buildup in inventory was weaker than expected in the weeks prior. And then this number was higher than normal. But based on the weakness of prior numbers, maybe the market didn't think so. certainly believe there's this continued tension around the expectation for China to bring a lot more demand online without a lot more global supply online, which would put prices higher. So oil closed at almost $78 a barrel, up 3.5%. In the Q&A at the dctoday.com today, someone had asked if I thought that we had a $70 floor in oil with the Department of Energy announcing we want to be buying back oil for the strategic petroleum reserve reload at $70.

Doesn't that sort of imply a floor? And I do think that in theory it does. I think that it doesn't mean that there's a ceiling in that range because the government didn't say they wouldn't buy higher, but they did seem to indicate they want to buy at that level. But the problem with this market interference is that the markets immediately know that the government is a buyer and that marginal capacity, the sellers price in that expectation. And so I think that there's an asymmetry in the risk and reward. You very likely have a lower risk of oil dropping below 70 if you're a producer, but you have a much higher reward, a much higher upside if other factors cause it to move significantly higher. And so that's sort of the interference factor from the government

trying to place a floor or the expectation of a floor. Then the other piece is, what if that floor doesn't prove to exist? What if oil collapses through into the 60s and the government isn't a buyer? And then you get a lot of uncertainty and market skepticism about the government keeping their word and so forth. I don't see that as a very likely scenario. I think the government would be very, very, very fortunate and very, very, very happy to be buying oil back into the SPR if that were to happen, and even here in the 70s. But we'll let this play out. The other comment I just wanted to make real quick is I did a little study this morning on periods where the dollar is dropping relative to Chinese yuan at a more sustained pace, more prolonged period of time.

yuan at a more sustained pace, more prolonged period of time. And we've had about seven periods that were kind of multi-month periods or multi-quarter periods even of dollar weakness and Chinese yuan strength. And in seven out of seven cases, the top three performing sectors were materials, industrials, and financials. Most of the time in that order, but they were all very strong. So there is potentially some correlative interest around the fact that those sectors seem to respond best to those conditions. And that's an environment we've gone into here the last couple months, a weaker dollar and a stronger Chinese currency. That's all I got for you today. I hope it's been helpful. We're going to have another Thursday, D.C. today before our Friday Dividend Cafe. Tomorrow is CPI Day, not to be

confused with Fed Day. The Fed will not be meeting again until February the 1st, but obviously people and markets expect CPI to be a big part of what the Fed is acting upon. My advice is to look through the CPI number to the underlying ingredients and understand both where food inflation, energy inflation, goods inflation, services, ex-shelter inflation, and shelter inflation. Those components are how I and shelter inflation. Those components are how I dissect it all. And it enables us to have a more holistic view of the real inflationary picture based on what we know to be the reality

in the shelter space right now. We'll see what the data shows tomorrow around that lag effect. Thanks for listening to, watching, and reading The DC Today. 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.

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