The Dividend Cafe - The DC Today - Wednesday October 19, 2022

Episode Date: October 19, 2022

Welcome to DC Today where I, Trevor Cummings, will be your guest host again on this fine Wednesday. Please join me for the video or podcast (links below), as there is quite a bit to cover and discuss today. David Bahnsen will be back on Friday with his normally scheduled program – Dividend Cafe Dow: -98.54 (-0.32%) S&P: -0.66% Nasdaq: -0.85% 10-Year Treasury Yield: 4.131% (+13.3 basis points) Top-performing sector: Energy (+2.94%) Bottom-performing sector: Real Estate (-2.56%) WTI Crude Oil: $85.63/barrel (+3.39%) Key Economic Point of the Day: Today we saw the published data for new housing starts and building permits Housing starts came in at 1.4mm on an expectation of 1.47mm Down 8.1% seasonally adjusted and down 7.7% year-over-year in September Looking at the attribution, we see new homes fell 4.7% and new apartment construction fell 13.1% Building permits came in at 1.56mm on an expectation of 1.5mm Rising 1.4% in the month of September Permits for new homes fell 3.1%, with apartment construction rising 8.2% Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Hello and welcome to DC Today. One thing you might notice about today that might be a little bit different than yesterday, I am more nasally than normal. I feel like I haven't gotten sick my entire life and then my son started preschool. So you'll have to bear with me today. But markets were pretty plain today. We had pretty hot markets the last two days. I always like to say markets have a tendency to take two or three steps forward and one

step backwards as they calibrate and try to figure out prices. Markets were down today. So you had the Dow down 98 points. That's down 32 basis points. S&P was down 66 basis points. NASDAQ down 85 basis points. The 10-year treasury, interesting stat there. Again, above 4% at 4.13%. That's up 13 basis points. Tapping on rates we haven't seen in 15 years. Same thing with the two-year. Top performing sector today, there was dispersion today. You had energy up 2.94% while real estate was down 2.56%.

Again, that's a high level of dispersion when your top sector is up nearly 3% and your bottom sector is nearly down 3%. I will add that energy was the only positive sector on the day. Again, as you might assume, crude oil was up $85.63 a barrel. That's up 3.39%. Like I said, markets two steps forward, one step backwards. Earnings continue to be strong. We had some strong reports these last few days. One thing that was catching a lot of attention of the news has become pretty normal these days. Every Fed president becomes famous. So the Minneapolis Fed president came out saying that the dot plot's not the barrier for them, that they would go above and beyond that to fight inflation. One thing I want to remind our listeners is for a central bank, they are constantly trying to earn credibility. Over the last handful

of years, the central bank has said things and not fall through with those things. And markets have kind of scoffed when they said they're going to do one thing. Markets misbehaved and then they backtracked. I think if you study the Bank of England right now and the lack of clarity that they've been giving on what's happening, you can see why violent markets are from one way to the other. So again, perhaps a little speculation on my point, but I think a lot of the folks in the Fed right now are trying to prove credibility and they're trying to flex a little bit to say, hey, markets, we just want you to know we will continue to fight inflation.

Now, for me personally, I am questioning a little bit if employment numbers start to get too soft, if they'll continue with that posture. But we'll see how it plays out. So the other thing I found quite interesting, I don't know why I find this to be funny, but I do find it to be funny. Joe Biden came out today and said there was kind of a three-point plan he was going to do to fight gas prices. We talked about it yesterday, taking from the reserves to help with supply. Again, intentions to lower gas prices. He also had some pretty harsh words and criticisms towards oil companies, saying that they should forego some of their profits and their activities of buybacks to fight to lower gas prices. He made some connection points to say, hey, why are oil prices a lot lower

and gas prices aren't? Now, there's a lot that goes into that comment of how the whole refining process works and futures contracts and a lot of other factors that I don't think the president was taking in as a factor today. But the part that I thought was funny is the first question from the media when he was done giving kind of this three point plan was, hey, are you only doing this because midterms are coming up and you really want to market to folks that you're in their corner and you want to kind of help your political party. Obviously, he responded no quickly, but I think we'll see a lot of that over the next couple weeks. Here's the reality. When people are going to vote, they are typically going to be somewhat

self-centered. They're going to look at their own life and say, hey, do I feel like I have a lot of employment opportunity? And do I feel like I can afford the lifestyle I want to live? Another way of saying that they're going to look at unemployment, they're going to look at inflation, gas prices is going to be a factor there. So again, if you're a politician, you are going to try to posture and push towards how you're an advocate to help people be fully employed and be able to live the lifestyle that they want to live. So again, if you go back and watch the interview, the questions were quite funny and his response, because I don't know, we know the truth. Another thing that I thought was interesting today,

the Supreme Court, or it was brought to the Supreme Court to block Biden's plan of relieving student loan debt. Now we knew that was happening. The part that I thought was interesting, I hadn't seen the statistics yet, but they ran a beta test. They started on Friday where they were allowing people to submit applications for the relief. And over the weekend, drum roll, please, they got 8 million applications in that first beta test. So it'll be interesting to see how well they can process all these things, as we've seen a lot of the time when we try to go to the DMV or something of that nature. So again, verdict's not out there. Another thing that was important for somebody who's a financial planner like myself,

you saw all the updates on the 2023 taxes, all the inflation adjustments. So the estate tax exclusion goes up to nearly 13 million. I think it's 12.92 with the inflation adjustment. The gift tax exclusion. So what you can give on an annual basis goes from 16,000 to 17,000. Why does that matter to you? Some of you might be contributing to 529 plans or something of that nature where you're trying to maximize how much you can give without having to do a gift tax filing. So, again, that'll be $17,000. For those super funding, again, you can take that $17,000, multiply it by five, and that's

for you and your spouse for college savings. For some of you, that won't apply, but for some, might be interesting. You can also go online and you can see all the new brackets that have been adjusted. Again, the standard deduction will also go up. I think that number was $27,700 for filing jointly on behalf of that first single filer. One piece of news that I thought was interesting, or I guess this would be a comment from one commentator, is they said, this is probably the most anticipated recession of all time. And I'll comment on that because you get a lot of headlines now saying, you know, the CEO of Goldman Sachs said this, or Jeff Bezos feels this. And I want us to remember that the stock market is a leading indicator when it comes to seeing kind of what the economic

health is. So you've already seen the stock market pull back 25 to 30%, which means that would be a leading indicator for something like a recession. But we have to remember that the way recessions are reported through the National Bureau of Economic Research, they're in hindsight. So if they came out today and said, we are in a recession or we were in a recession, that's not very helpful to you as an investor, because like I said, the stock market is a leading indicator. So I don't know if I would put a ton of value in kind of the headlines of this famous person or that famous person feels this particular way about where the economy is right now. I say that just to help calm your nerves a bit. Here's one thing I also found interesting. There was an LPL research where they showed that this year, if you look at positive

returns on a daily basis for the market, there was only positive returns on a daily basis, 43.5% of the time. That is the worst, if you just hold that as a record back through history, since 1974. Because I'm curious, I went and I was like, man, I wonder how markets performed in 1975. Over the last 50 years, 1975 was the second best year for markets. Again, markets tend to go two steps forward and one step backwards, two steps backwards and three steps forward. That's how markets work. It's constantly calibrating. The big news that you'll find in the written today was you got new housing starts and you got permits what you'll find is on the building permits the expectation was 1.5 million it was 1.56 that means permits rose 1.4 percent in september you may or may not

find this interesting new homes actually fell 3.1% and apartment construction, that was where the attribution was. It actually rose 8.2%. So there is people out there putting permits in to build new apartments. New housing starts, the expectation was 1.47 million. Again, that expectation was lower than what we've seen. So seasonally adjusted, that was down 8.1% in September. A year over year, it's down 7.7%. Again, on attribution, new homes fell 4.7% and apartments fell 13.1%. We talked about this on DC Today yesterday. Folks are sitting on their hands. They want to see what markets are going to do. Mortgage rates are really high. I think I read today that mortgage demand is the lowest level since I think it was 1997. So again, that's not surprising to us when we see mortgage rates tapping on the door

of 6% and 7%. We understand how that challenges affordability for a buyer. Somebody's going to buy a million dollar home. The mortgage is a lot different at 3% than it is at 7%. There is also a high level of concern when people are talking about recession and inflation. It doesn't lead folks to have a high level of urgency to build new things or buy new things. So again, there's always two factors. There's the actual numbers and what's happening, and it's the narrative that's birthed from that

and the impacts it has on all of us from a sentiment perspective. I will note one thing that I really liked that stood out today. Every Wednesday, David writes the weekly portfolio holdings report that's published for all clients. So if you're a client, you're listening to this, you got this this morning. One of the little tidbits on there was one of our portfolio companies raised their dividend by 10%. And again, for a team that focuses on dividend growth, David Bonson wrote a book called The Case for Dividend Growth. I would encourage you to read it. Again, it helps us because we're so maniacal on focusing on companies that have high free cash flow, management teams that want to share that free cash flow in the form of a dividend with investors. And we believe, and we would argue, that the best way to find the current value

of a company is the net present value of their future cash flows. Now, again, it's hard to speculate the future, right? But who would have the most inside information? The management team. So if the management team is raising the dividend, they're kind of telling you a foreshadowing of what they believe the health of the business is. So again, we always like to celebrate that when we have a portfolio company that raised their dividend. Again, double digits is significant. Tomorrow, you'll get initial jobless claims, you'll get the Fed Manufacturing Index, and you'll get existing home sales. I'll encourage you to go to the DC Today to read the Ask David section. Again, I told you yesterday, I'm a huge fan of the Q&A part. It allows us to get to the real meat of what folks are interested in. David

will be publishing his normal Dividend Cafe on Friday. He's still in New York with our team doing their diligence trip where they meet with all the managers. And again, he's going to digest all the information that he gets from these meetings. He's going to probably create it in some sort of deliverable. And then whether it's as clients or something more freestanding, he'll deliver his new learnings. But you'll have me again tomorrow. So I'll be back to provide you DC Today tomorrow. And I will sign out for tonight.

to you DC Today tomorrow, and I will sign out for tonight. 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

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