The Dividend Cafe - The DC Today - Wednesday, March 29, 2023

Episode Date: March 29, 2023

Today's Post - https://bahnsen.co/3JRB2yV I read an interesting line from an analyst I read daily in my morning research this morning … “if the bulls are to reclaim control of this market, beta likely needs to reassert itself; hasn’t happened yet.” Of course, this sort of begs the question – bulls of what? Well, if one means “the market index,” then they have essentially said, “if those bullish for beta are to get what they want, beta needs to do well.” I think we call that a tautology. “If I am to eat ice cream I like, I will first have to eat ice cream that I like” is not a super profound observation. But I am not picking on this analyst or the comment – I am pointing out the premise hidden in the statement – that a “bull” means the “index” (beta just measures the portion of a return that is really index/market oriented). It highlighted for me how differently we think at TBG – that one can be agnostic about a broad market index (which is neither bullish nor bearish) yet still bullish on an investment strategy that is not remotely connected to beta … Indeed, to that end we work. 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. I am sitting here up at LAX. I'm boarding a plane any moment. sitting here up at LAX. I'm boarding a plane any moment. So we're doing kind of a funky thing. I am actually recording before the market is closed, which I just did two days ago and said it was the first time I'd ever done it. Now I'm doing it two times in three days. But then I'll get on the plane when I'm done recording and we'll update the market closing data, which is only about 40 minutes away from as I'm sitting here recording. And so the written DC today will come all updated and buttoned up. And then I'm just sitting here recording without the luxury of knowing exactly how the day closed, which of course doesn't matter in the grand scheme of things whatsoever.

As I'm recording, the Dow is up over 300 points. S&P is up 1.4%. NASDAQ's up over 200 points at 1.8. So a big rally day here. What's been a pretty good week and what's been a pretty good recovery and what is just kind of confusing a lot of people. And yet it does feel that some of the deeper anxieties undergirding the banking system have settled a little bit. I don't really want to talk much more about kind of exactly what's happening today. I'd like to do even less of that as we go and each day I usually am finding some

different inspiration to talk to you about. Something came up in my morning research. For those of you who are newer to DC Today, or even those of you who are real familiar, but maybe just not aware, I read an awful lot of research every morning. And I tend to be a very early morning guy. And that early morning time is where I not only do a lot of the writing that I do, but a significant amount of reading and research. And there is a particular bulletin that I read every day. And just because I'm about to say something that can sound sort of critical of the analyst who wrote it, I'm not going to say what I'm referring to, but because it's an analyst, I like a great deal at a firm I absolutely adore. But there's just a particular thing I want to pick on.

And the line was that if the bulls are to reclaim control of the market, then beta likely needs to reassert itself. assert itself. And it occurred to me, the flaw in this sentence and this thought is more than, I mean, first of all, that isn't true if you're open to the idea that you could be bullish about something other than the market index. And if you are talking about the market index, then it's literally a tautology. Like that's basically the same thing as saying that, you know, well, those bullish for beta are only going to get what they want if beta does well. And my analogy, as I'm often prone to do, is to turn it into a food thing and say, I am to eat ice cream I like if I can eat ice cream I like. That's what market beta is, is the return and risk correlation to the broad index, to the overall market. So it isolates you to that kind of systematic function of markets, the broad market index. And we capture it, measure it in a form of what we call beta,

the portion of your return that comes from the overall market. And the critique I would have is that it is entirely possible to be agnostic about the market index and bullish about other things. And so to the extent that one is defining their market or investment or risk asset experience purely in the context of beta, then it is certainly true that if beta does well, then your beta experience will do well, right? I mean, it's obviously redundant. But I don't think that that is how investors ought to be thinking about the moment. I believe that it would behoove people to have an investment strategy that is not dependent entirely on market beta. Now, market beta usually will lift all boats, like unless you're short the market, right?

Unless you're reverse correlated or anti-correlated to the market. right? Unless you're reverse correlated or anti-correlated to the market. But risk assets, if you're having a high rally in market beta, generally it's lifting all risk on assets. And yet I don't believe that in reverse, that has to be true, that in a period where market beta is not catching steam, that nothing else can be doing well. And so, I don't know. It inspired me to kind of highlight that distinction a little bit. There was big news that had kind of broken last night, and then I got to read more about it this morning. And again, Alibaba is a major tech and e-commerce name out of China.

And them splitting into six different companies. And it's created this big rally in a lot of Chinese internet companies today and the Hong Kong index and so forth. And it may not be material to you or to us, but I bring it up for a macro reason that there has been a real downward pressure on risk premium of Chinese tech companies for some time out of fear of what the CCP could do about monopolistic concerns, where the CCP could exercise monopolistic abuse, and just an overall regulatory framework that is concerning. And it just strikes me that something like this could very well be a tremendous unlock of shareholder value

in a lot of these names while pacifying some of those concerns. And I'm not saying it to bring up a point about a particular company or a particular theme as much as the global macro implications for ourselves as emerging markets investors. I think the results in the last 24 hours may have been massive to that company and even the broader Hong Kong exchange. But what it could mean for other markets, sectors, countries, and obviously certain particular companies is really meaningful if there's a path going here. And it's worth watching. I can assure you we intend to. And then finally, just an anecdotal issue that is on my mind. I believe you know Friday morning markets were down quite a bit. They came back, but there was a 300 point downturn in futures in

the morning and a bunch of talk about Deutsche Bank, largest both merchant investment commercial bank in Germany. Their CDS spreads have blown out, credit default swaps, meaning what you have to pay to insure against a debt default. That cost had gone up a lot, and obviously equity price had come down. And it kind of boiled over a little bit, settled down throughout the day, and a lot of broad markets did as well. And there wasn't a lot of borrowing on European Central Bank swap lines over the weekend at all, which I think would have been a telltale sign of ongoing anxiety.

It's entirely possible this was a weird 24-hour blip of a headline and concern. But it did get me thinking, though, that after the Credit Swiss incident falling into the not so loving arms of UBS, and that Swiss National Bank orchestrated deal and the counterparty risks that exist there. I don't think the European banking system could handle a Deutsche Bank commotion right now. And I don't think world financial markets, I don't think US counterparties and Wall Street would appreciate it very much. And so I just don't want to lose sight of the vulnerability that we live with. I talk all the time about geopolitical, monetary and fiscal instabilities and vulnerabilities that are a part of investing experience right now. And this is another example

that perhaps this one is fine. And I don't see anything eminent, eminent about Deutsche Bank's situation. But I bring it up to say that there are headline risks that could turn on us any time. Now, of course, it would be true, even if we didn't know about it. Most of the time, when those things happen, we didn't know. But now this sort of having dangled a carrot a little bit, I just am surprised that the media has moved on so quickly. They generally like to make hay of something. And maybe that's a sign that there's really nothing there. But there's an asymmetrical reality here.

There's not a lot of reward. Nothing comes of it, but there's significant risk. So whether it's that or whatever the next thing is, that's kind of something we want to keep our eyes on. I wanted to mention it. Okay. So I can't give you closing data, but from the time I started talking to the time I ended, we're still up over 300 on the Dow. I'm going to go board a plane in a little bit. I'll finalize the numbers of the day once I am airborne, headed to Washington DC, where I speak at a big summit meeting tomorrow and have some meetings over the next two days. And I'm back in Southern California

on Friday night. So a 48 hour trip to our nation's capital. I'll leave it there. Thanks for listening to you. Thanks for watching. Thanks for reading the DC Today. Thank you. 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

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