The Dividend Cafe - The DC Today - Wednesday, May 10, 2023

Episode Date: May 10, 2023

Today's Post - https://bahnsen.co/44MFjx8 So the CPI today came in today at 4.9% year-over-year, the lowest we have seen now since April of 2021. 5% had been expected so it is another month of slightly lower than expected year-over-year movement. And yet … Shelter is showing an +8.1% year-over-year price inflation still now in April. Yep. +8.1%. So, at the 34% weighting you can surmise that 2.75% of the inflation is, well, poppycock. That puts the actual present CPI somewhere between 2% and 2.5% which last time I checked is the Fed’s target. Used car prices are down -6.6% on the year (deflation). Gas utilities are down -2.1%. Medical care was only up +0.4% on the year. Food and transportation, though, are still showing higher annualized price increases. It is interesting to hear people talk about a slowing job market as Job Openings (JOLTS) started the year at 11.2 million and are now at 9.6 million. I am not sure I have ever heard nearly 10 million unfilled job openings described as a “slowdown” before, but you do you boo. Now, the CEO of ZipRecruiter did come out and say, “demand for recruiting services is declining” – which may mean things are slowing down (and also may mean hiring is so easy right now less people feel the need to use recruiters, but I digress). I do think there is no question that companies are paring back new hires, but I also think some industries (see: tech) were way, way, way over-hired. Bottom line, I don’t see anything contradictory (or complicated, for that matter) about saying these two things at once – (1) The job market is good; (2) It may be headed towards “less good” than it has been. 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 another day of the DC Today. It is the Wednesday edition. It was a weird day in markets. I don't want to say it was boring. I don't want to say it was exciting. Kind of somewhere in between, but definitely weird. Let's start with the economics, get to kind of the bigger, important stuff that took most of my morning, my early morning, and then the market day itself was what it was. The CPI number came out, and it did come at 4.9% year over year. Analysts have been expecting 5%. And so a tiny bit lower than expected. And the lowest level we've seen now since April of 2021. So the lowest year over year number in a full two years. And so I just am going to give another caveat. I expect a

lot of you know where I'm going, but it's profoundly true and accurate, what I'm about to say, and important. That is that the shelter component into CPI came in at 8.1% year over year. That represents 34% of the CPI weighting. I believe the owner's equivalent rent was 8.8 percent of that and the rents were 8.6 percent of that. So it was blending to 8.1, which at a 40, excuse me, a 34 percent weighting means it was adding 2.75 percent to the 4.9 inflation rate. So without it, if shelter was zero, hypothetically, you would have had a 2.25% inflation rate. And I'm willing to say that the shelter inflation wasn't zero because I'm partially willing to say it may have been negative 2%, negative 1%. Because I'm partially willing to say it may have been negative 2%, negative 1%. It could have been positive 1% or positive 2% as well. There's a lot of complexity and challenge.

But again, as long as we're still a month or two or whatever it is away from this lag effect catching up of the rents and leases that were effectuated a year ago. And we're that far disconnected from the current level of rents, of which abundant levels of data are available. My point is simply that outside of this clearly idiosyncratic and highly distortive lag effect of the shelter inflation input, you're probably at a two and a half inflation. And if someone wants to argue for three, that's fine, but it ain't five. And there we are. So 4.9, futures shot up big. When I left for my run, they were up 200 points. And then when I got back, they were still up, but it had come down. Then the market ended up going negative.

And then it went real negative, about 250 points, I believe, down, talking about the Dow, all the while the NASDAQ staying up on the day. But then the Dow ended up closing down only 30 points. So it kind of had gone up pre-market. It came down. It got down much more, kind of V'd down and then back up. So there was a little bit of volatility within the Dow side. The NASDAQ closed the day up 1%. The S&P closed up almost half a percent, not quite. But communication services was the big winner on the day. Energy was down one. And we'll see what happens in the market tomorrow. But I do think that there was a little bit more uh escalation today around bank turmoil energy prices had been lower earlier in the day oil ended up up on the day

actually um closing at near 73 a barrel and then you had a really significant rally in bonds. Again, the two-month Treasury bill, the yield dropped 15 basis points. And what's fascinating is that right now the futures are pricing a 42% chance of a rate cut in July. of a rate cut in July. Now, I don't know if that surfaces or not, but there is a 79% implied probability of a cut by September and 100% chance in the Fed funds futures of a rate cut by the end of the year. So really, you have a strong signal in the markets that's catching itself in the short end of the curve, a strong pricing indicator in the markets that there will have to be a mea culpa from the Fed on the last rate cut or two and real quickly. My view is that there should be a mea culpa from the Fed real quickly and that these last two rate cuts should not have happened. I'm not sure I believe that that will happen that quickly by July. But who knows? There's a lot of catalytic events along the way that could necessitate that, including ongoing turmoil in the banking system. I think I've

covered the basis here of what happened in the market today. Definitely the Fed funds futures action, which again, a lot of it was in response to the CPI number and just the clear indication that the Fed has no real foundation by which to say that inflationary concerns are why they feel they need to keep tightening. They could very well go with a pause and stay there. They could also end up cutting. And if so, you could decide if that's a good thing or not. If you're borrowing money And if so, you could decide if that's a good thing or not. If you're borrowing money and they cut rates, you probably think it's a good thing. But if you live in the economy and they're cutting rates because the economy is going

in the toilet, that's probably a bad thing. So be careful what you wish for, my borrowing friends. That's more or less all I have today. The Ask David in the DC today, someone asked what it means when we talk about a company beating expectations for earnings or beating expectations or forecasts for revenue. And who sets these expectations and why do we care? Where do they come from? And, you know, it's a good point. I don't realize a lot of times that there are certain things I take for granted in terms of financial jargon and financial concepts and financial realities that not everyone is necessarily in tune with. Expectations are, of course, set or at least initially set by the companies themselves.

They're telling analysts, they're making projections and what we call guidance as to what they expect they're going to earn. And then analysts get to go pick it apart and say, well, yeah, but they're assuming they're going to do this with this division, and we think it's going to be worse than that. And our analysis indicates this could go better. So analysts can start turning the knobs. So expectations really come from the companies, and then they get modified by analysts.

And some analysts can be right, some can be wrong. You get what's called a consensus estimate, which is sort of the median level from a group of analysts. And some analysts can be right, some can be wrong. You get what's called a consensus estimate, which is sort of the median level from a group of analysts. And that's what we mean by expectation. We, of course, are dividend growth investors. So I don't care one bit what an analyst says a company is going to do next quarter. I only care what the company itself says they're going to do next quarter to the extent that I'm more interested in what they're talking about five quarters down the line or 10 quarters down the line. In other words, are they saying things that has a short-term connotation, but a long-term ramification to dividend sustainability? We care about that. So that's the answer where expectations come from.

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