The Dividend Cafe - The DC Today - Wednesday September 28, 2022

Episode Date: September 28, 2022

A rally day on Wall Street and a thorough explanation in today’s DC Today podcast! MARKET ACTION Dow: +549 points (+1.88%) S&P: +1.97% Nasdaq: +2.05% 10-Year Treasury Yield: 3.73% (-23 basis points) Top-performing sector: Energy (+4.40%) Bottom-performing sector: Technology (+0.92%) – worst sector still up by almost 1%, and this was heavily weighed down by Apple being negative WTI Crude Oil: $81.88/barrel (+4.31%) Key Economic Point of the Day: National Rent Report showing national residential rents down -0.2% month-over-month, first monthly median decline in over two years Links mentioned in this episode: 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. Well, hello and welcome to the daily edition of the DC Today, your daily market recap. And contrary to popular belief, every now and then markets can rally. And you had one of those days today. Even in the midst of a bear market, you had a lot of upside momentum. But it didn't start that way. Last night, the Nikkei at one point was down 600 points, well over 2%. And although after the time I went to bed, it came back a bit. It closed down 1. percent, 397 points.

So I definitely woke up to a very challenged market. And here's what happened. And it did not create the rally in markets right away. what I said yesterday about my working theory that the liquidity coming out of the financial system and the upward pressure on US bond yields and really all sovereign bond yields globally was putting the Fed in a very difficult position and that the Fed was likely going to use quantitative tightening to blink before the Fed funds rate. Well, I think it was 3.40 in the morning Pacific time that I started getting pop-ups and beeps and bulletins about the Bank of England actually announcing that they were going to use bond buying as a mechanism of stabilizing their currency and

bond yields. They have been doing quantitative tightening, and they announced they were going to do, when they call it bond buying, that's called quantitative easing. Within 24 hours, what I said about our Fed, so it's a different, I didn't get a prediction right. I'm just pointing out that another major country, one day later, did the same thing I was talking about yesterday.

So I think that it helps reinforce a little bit about the central bank thinking that of the two major policy tools they've all quadrupled down on and are now having to unwind, and that is the zero bound interest rate and the quantitative easing, the reversal of those two policy tools, the one that is easiest to kind of slow walk is quantitative tightening because the, frankly, the political class and most of Main Street doesn't understand it, gives them the ability to effectively waffle on what they've said without it being so clear, without it being so obvious. So I can't say right now that the Fed has done what I said they're going to do. I do feel quite confident that that is a logical theory, but I thought it very important to point out that

the Bank of England, in fact, is doing it now and saying, and once we stabilize things, we'll go back to our tightening. But it's quite odd to be in the middle of selling bonds in the marketplace to announce you're going to start buying bonds to stabilize your financial system. But again, the US stock market rally today was probably more of a simple relief rally. Things were significantly oversold. When you have the largest market cap company in the US down, Apple is the largest market capitalization company in the United States. And it was actually negative over 3% at one point. I think it only closed down over 1%. But my point being that is quite a rally when you have a company down like that, and yet

the breadth of what everything else was, was so significant. Energy was up over 4.4%. And again, technology was the worst performing sector, but it was up almost 1%. It was up 0.92. And if you, all of that attribution of why it wasn't more robust than NASDAQ was up 2% would have been because of Apple effectively kind of being weighed down by what they, apparently the reports are rumors of demand weakness and lowering the production plans for their new phone. So I'll save Apple commentary for another time, but that's kind of the explanation. So the overall story, S&P up about 2%, Dow up 550 points, up almost 2% as well.

And the other thing I'd point out, the Dow being up 550 should be the end of the story. But again, it gave up 120 points. It was up 670. It gave up 120 in the last five minutes. And the only reason I'm bringing this up is to make it abundantly clear to listeners, especially those of you that are clients of ours that are engaged in our philosophy and smart enough to know that these technical day-by-day things are just so stupid, so dumb. But to get a better understanding of how markets work, you have a technical factor putting major downside pressure in the closing minutes most days right now. And it's. Okay, so if one of us wants to jump on a screen and sell millions of dollars of

stock, and for some small investors, it could be thousands of dollars, whatever it is, obviously, that can't move markets. But to see 120 points go in five minutes, there is either ETF factors, large option covering short, and it could go either way, positions being taken off that are levered or put on. It isn't important. I always get to find this stuff out in hindsight, but I don't get to know it in advance or in real time. But I just want to make clear that the additive volatility late day is clearly coming from extraneous circumstances. And I bring it up because it speaks to extraneous factors, technicals, and movements in the market. Public policy, Senator Joe Manchin, indeed,

he went out with a blaze of not glory on this one. He's not getting his promised pipeline. His energy provisions, he had to pull from the conditional resolution to fund government. It ended up passing once he pulled his adjacent connected bill that he was promised. He was unable to get enough Republican support and enough Democrats killed it that he did not get any of the things that he had traded his climate spending bill for. So I've been watching politics a long time. I don't say that braggingly because I actually am ashamed of it. But in my entire life, I don't know that I've ever seen a senator get played this badly. And what happens next really is going to depend on what happens to Senate leadership. I think Manchin still has a chance of getting some version of what he wants done in a lame duck session if there's a change in Senate control.

But I don't know how you can kind of handicap where these things go on Manchin's particular bill until you know what Senate leadership will be post-election. you know what Senate leadership will be post-election. Other policy news real quickly before I move to housing is that there are reports again, and they were circulated not just in Fox, but also Bloomberg, CNBC, all financial media, and no denials that came out that all three, Treasury Secretary Yellen, Brian Reese,, who is President of Biden's National Economic Council director, the same role that our own Larry Kudlow had in the prior administration, Rees has in the Biden administration at the NEC, and then Cecilia Roos, who is the head of the chair of the Council of Economic Advisors, that all three would be planning to leave their positions after the midterms. Now, there was not confirmation of this report nor denials,

but it was from credible sources reported multiple outlets, blah, blah, blah. I don't have any confirmation to give you, but I think that would be very interesting. It's not at all surprising when one goes after midterms. It's not at all surprising when all three wouldn't make it through a whole four-year term. But if they're all three going to be going in unison after the midterms, that would be interesting to see what kind of shakeup it would create in the economic policy portfolio of the Biden administration. Biden administration. Okay. The national rent report came out for the prior month showing a 0.2% month over month drop in rents. The median rent of residential living is the first time the national median rent has declined in over two years. Wasn't a huge decline, but again, in over two years. Wasn't a huge decline, but again, even though I don't expect to see this into the inflation data, it most certainly is going to have a lag and yet is putting

disinflationary pressures into housing. Speaking of which, the average cap rate right now for apartment buildings is about, well, before today, because the 10-year rallied huge today, the yield got hammered. It was about 25 basis points. And I mean, just think about that. The spread between the average cap rate of an apartment building and a 10-year treasury bond was a quarter point. And let's say today it's now half a point because the 10-year yield was down 25 basis points. That's the smallest in history. And it would be very difficult to see a lot of those economics penciling. And it puts a lot of downside risk into the asset class if cap rates are that low. Now, the 30-year mortgage came out at 6.52%. The average, that's a new high in this cycle.

And the volume of refinancings were down 89% from a year ago. That's a 22-year low. Not a big surprise the rate's this high. Because the Bonsai Group's main office is in Newport Beach, even though there are people listening all over the country, and we have offices in five different states, and clients in well over 40 states, and listeners in dozens of countries, I don't mean to, I only say Orange County because it's still kind of a certain amount of hub for us, but I just wanted to say to those of you in the Orange County residential market, the volume of activity last month for sales was the third slowest August. It doesn't help a lot to say like something was the third slowest month because some months are naturally going to be slower than other months. But apples to apples, it's the third slowest August since 1988 in volume.

That's a pretty long period of time, almost 35 years. And median prices for the whole county are now down 6.6% since the month of May. the whole county are now down 6.6% since the month of May. So in three months, you've had over a 6% drop in median prices and a significant drop in volume. And I bring that up because Orange County is an affluent county and generally thought of in a more protected zone of pricing. And yet my working thesis here is that unlike most credit-oriented financial crises, because I believe this is going to be an affordability and valuation-driven adjustment, I think the most expensive property is the most vulnerable. Is housing going the way of 2008? No, no, no. I say it all the time.

Even one who believes we're due for a long overdue correction. We're not talking about 2008 circumstances. You have to remember that 80%, this is just a disgusting statistic, 80% of mortgage volume in 2007, late 06, early 07, right at the peak of that, what became subprime crisis, 80% of it had sub 760 FICO scores. So credit scores that were either not great, but okay, or flat out bad, 80% of all mortgage volume nationally. Today, it's less than 35%. So you just have an entirely different credit profile, an entirely different equity position. And of course, you have an entirely different banking system, as far as the amount of leverage in the system and counterparty risk and other very complicated financial elements that were unique to the GFC. I can believe and do believe

two things at once, that we are due for a housing price correction and that it is not something synonymous or happened in 08. And so that's our theory. We're sticking to it. Feds, central banks all over. What are they doing about quantitative tightening? Equities rallying as bond yields fell. We've been saying that one had to happen before the other did. It happened today. Will it be followed through on tomorrow and Friday? We don't know. We'll see. It's immaterial long-term, but obviously in the short-term jitters that people have of the current market, a lot of people have their eyes on it. You know we're going to have our eyes on it. It's what we do. My partner, Brian Saitel, will be bringing you the podcast and video tomorrow as I am up at the Reagan Library. I'm recording here from my hotel, but tomorrow, ready for a big event.

You'll hear more about it tomorrow. Readthedctoday.com. Get ready for a dividend cafe on Friday about tough markets. We're here for you. Thanks so much for listening to and watching the DCE 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 Thank you. 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.