The Dividend Cafe - The Dividend Cafe Monday - July 1, 2024

Episode Date: July 1, 2024

Dividend Cafe: Market Updates, Supreme Court Rulings, and Mid-Year Market Overview In this special Monday edition of Dividend Cafe, listeners are treated to a packed episode covering a range of topics. David provides market performance updates, highlighting the fluctuations and gains in the Dow, S&P, and Nasdaq. Significant attention is given to recent public policy events, notably Supreme Court rulings affecting President Trump's legal situation and regulatory powers of government agencies. David also previews a forthcoming special mid-year market review edition to be released on Wednesday, July 3rd, instead of the usual Friday. Additional coverage includes updates on housing market trends, insights into potential policy impacts on various sectors, and reflections on pessimism in economic discourse. Tune in for comprehensive updates and analyses to stay informed on market movements and policy implications. 00:00 Introduction and Weekly Overview 01:32 Market Recap: Monday's Movements 04:38 Supreme Court Rulings and Political Updates 05:52 European Politics and Market Implications 07:14 Debate Aftermath and Election Predictions 10:35 Supreme Court's Chevron Ruling and Regulatory Impact 12:06 IRS Ruling on Pass-Through Entities 13:11 Housing Market Trends and Fed Expectations 16:06 Energy Sector Performance and Market Trends 17:09 Laws of Pessimism and Human Nature 18:12 Conclusion and Upcoming Content 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 Dividend Cafe special Monday edition. You're in for a real treat because you're going to get two Dividend Cafes this week within just about 72 hours. We're going to have today's edition. I'm going to go through with you right now all the normal things we do on Monday, and it's kind of action-packed because there was a lot, and I mean a lot, of public policy things to discuss thanks to the debate on Thursday night and thanks to the Supreme Court with a series of rulings both on Friday and again today. But then because of the 4th of July holiday on Thursday,

I've decided I'm going to release this week's Dividend Cafe. That would normally come Friday the 5th. We're going to release it Wednesday the 3rd. And it's kind of a special edition in the sense that we're at the halfway point of the year. We're going to do a deep dive into where things stand middle of the year, the good, the bad, the ugly of the first half of the year and updates on our 2024 themes and perspectives from our annual white paper six months ago.

We'll check in on that and then just sort of provide updates and perspective of what we're seeing for the second half of the year. That'll all come out Wednesday on the 3rd. The market is, of course, closed on Thursday the 4th in celebration of our nation's birthday. And then the market is open Friday the 5th, but the Dividend Cafe will have already come out. so that's the plan for the week let's get right into it the market this morning actually opened up and immediately got up about 275 points and that just lasted a few minutes and then dropped by within about 90 minutes of trading had given all of that back and then slowly kind of came up a little higher and just stayed

moderately up for the last four hours of the day. The Dow closed up 50 points. The S&P was up, I think, what was it, 25 basis points? 27 basis points. And the NASDAQ was up about 83 basis points, which you can always tell when the Dow is up a little like that and the NASDAQ was up more, it's very likely the technology was the top performing sector and it was today. And it was a very large delta between the up sectors today and the down sectors. Tech was up 1.3%. Materials were down 1.5%. You don't see that all the time. The bond market sell-off has been quite substantial, which is interesting because Friday morning when the PCE data came out, which I'm going to go over in a second, just kind of reiterating that inflation was what they

thought it was. No surprises there. 2.6% year over year, only up 0.1% in the month. Again, reiterating what we already knew from the CPI data about two weeks earlier. And the bond yields dropped a little further and they'd been sitting around four and a quarter for a while. And then bond yields spiked up a bit by the end of the day Friday. And today the 10-year yield was up another 13 basis points. So it actually closed at 4.47. So that's a pretty big sell-off in bonds just in the last two market days. I'm keeping my eyes to a little bit more explanation behind it. I don't want to offer an explanation now that I can't really stand behind. I want to give you something better. There's a chart in thedivinacafé.com today that shows the percentage weighting of basically the earnings from the top 10 companies and then

the market cap of the top 10 companies. And it does it over time. And then it shows the delta between the two right now. And i just encourage you to look at the chart i think it is very telling and then congratulations is in order and i provided the charts here but nvidia is up three thousand five hundred percent over the last five years and it is mirroring almost to the decimal that Cisco was up 3,500% in the five years building up to March of 2000. Okay, let's get into all these other stories and everything. There isn't much else to say about market other than some first half of the year recap, as today was literally July 1.

That's what I'm going to save for the Wednesday Dividend Cafe mid-year check-in edition. But when you move into the news side, I think the big news today was the Supreme Court ruling that President Trump is in fact immune from prosecution for official acts taken while in office, not actions taken when not in office, and then not immune for unofficial acts. But what it does is it punts back to the lower court some need for debate as to what constitutes official acts and what doesn't. And the particular aspect of conversations with the Justice Department while in office are certainly deemed to be official acts. So it isn't necessarily a wholesale win. It's definitely not a win for the prosecution. It's a significant setback,

but it's not as black and white because now there is a need to go back to the courts to get clarification on some other things. And that will, again, at least it represents a probably substantial delay. So worth noting there. for those that think sometimes that there's too much on U.S. politics going on, that it's nice to go outside the dysfunction of U.S. politics every now and then to go into the dysfunction of European politics. You know, if you're going to be looking at dysfunctional politics, why limit yourself to one continent when you could go into other zip codes, other continents, continent, when you could go into other zip codes, other continents, cross oceans, and find some similar dysfunction to help cheer you up. All that to say there's elections going on across Europe. The interesting thing is Marine Le Pen's national party in France is almost certainly now,

for this first round, going to end up with not only a plurality, but a substantial one. ground, going to end up with not only a plurality, but a substantial one. The temporary question as to whether or not it would even achieve an outright majority, it's hard to get over 50% in the coalition because of the multiple parties that take hold. But President Macron, the current incumbent sitting President Macron, looks like his party will end up with a third or, excuse me, a fourth or a fifth of the representation that Marine Le Pen's national party will. And so it's an interesting setback and appears to be at least temporarily a coalition, a shifting of coalitions in France. We'll leave it there. a shifting of coalitions in France. We'll leave it there.

On the policy front, there is, understandably, for those who caught the debate Thursday and caught the aftermath of the debate, there's a lot of perspective out there about what it might mean and not mean. And so it's conjecture to some degree. People that watch the debate don't need to hear any other conjecture now. People that have heard highlights or heard what others have said on both sides of the aisle about it, you know, you can figure out kind of how that all went. I don't need to pile on there. But what I do want to say is, you know, when I think about the market response and where things stand in terms of the impact for the economy and whatnot, it's still to me in this category of unpredictable. I don't believe President Biden looks set at this time to bow out of the race. There's some who believe he will. They've done a lot of damage control and pushback on that.

They've done a lot of damage control and pushback on that. And short of people like significant senior politicians in the party, former presidents Obama or Clinton or former Speaker Pelosi, people of that stature, short of someone like them pushing for a change in the ticket at this stage, I'll be surprised if it happens, but it certainly could. At this stage, I'll be surprised if it happens, but it certainly could. But what we do know is the betting odds have gotten up to 60% chance of President Trump being elected. And it's not 40% of President Biden. It's 40% that the Democrat might win, but there's only a 29% or 30% chance that President

Biden would win. only a 29 or 30% chance that President Biden would win. So embedded in these odds is the implied math that they think there's a 10% chance of a Democrat not named Joe Biden winning. So take that for what it's worth. Do I think there's a sector that could benefit if polling and other anecdotal things start to price in the idea of a President Trump victory? One of the key themes I've talked about a thousand times, I've studied immensely. It's ingrained in both my own kind of political junkie knowledge and belief and experience and also a forecasted view from an investment standpoint, is that most things that could affect markets and

the economy are hard right now, with even certain strong opinions about where the presidential election would go, for the simple reason that without clarity of the House and Senate in this environment, it becomes very difficult. One exception may be things that have a lot of potency as a result of executive order and stuff that the president can control on his own. And that includes approval of liquefied natural gas projects where President Biden stopped a handful just by executive order. Ultimately, you know, the Senate as a committee approves a lot of this stuff, but the president has a lot of power about what gets and doesn't get to that Senate. And so export LNG, I suspect could be a beneficiary apart from Senate House clarification, but we shall see.

The other piece though, I talked about in the news events, the ruling today about the immunity from the Supreme Court.. I talked about intermarkets with the debate and the uncertainty and all this stuff. But the other thing I want to say is the Supreme Court on Friday striking down the so-called Chevron ruling, which was essentially a legal statute passed in the 80s that allowed regulatory agencies to have a lot of leeway where Congress wasn't very clear. And the two-pronged legal standard before was basically, was Congress clear in the law they passed on this? And if the answer was no, and the administrative agency, regulatory body, And the administrative agency, regulatory body, unelected people, but nevertheless, you know, governmental employees, then set a rule.

The second prong standard was what they did reasonable. unacceptable, that Congress needs to write clear laws, but giving a kind of carte blanche authority and empowerment to regulatory agencies who are not entitled, according to the Constitution, to write laws just on the basis of what they did may have been reasonable was not adequate legal grounding. And so this does have the potential to disempower a significant amount of the regulatory bodies that are done in administrative agencies in our former government. So I'll be watching that very closely to see where the actual meat on the bone proves to be in the impact. gotten a lot of press, but I think is important for the public policy section of Dividend Cafe, especially given the amount of clients and investors we work with that are engaged in LLCs and partnerships and other so-called pass-through entities, is the Treasury Department and IRS ruling that no longer will entities be able to move certain liabilities or assets from

one entity to another related entity for kind of tax advantage purposes, that there will have to be some form of economic substance for it to be legit. And I'm not sure what exactly will be engaged in that, but we will see. I think that they're talking about having about a $50 billion net impact. And I do have a link in Dividend Cafe to the IRS's actual ruling on transfers, particularly where one is doing it to try to optimize the cost basis. So there's some tax complexity in there, but nevertheless could have an impact out of policy by nature of IRS and Treasury's ruling here. by nature of IRS and Treasury's ruling here. So I mentioned the PCE. What I didn't say is that the core goods that came out on Friday were showing negative year-over-year price movement down 0.4,

excuse me, 0.4% on the month, down 0.1% on the year. So very slight deflation in goods. And obviously we know the inflation total was 2.6, services being higher. I think some fascinating information on housing, when home sales volumes were down another 2.1% in May, they had been down 7.7 in April. The volume right now of activity, which has been slowly dropping sequentially for quite some time, is now at the COVID lockdown levels. Like the same amount of houses are selling now that sold when the country was shut down back in March and April of 2020. It's just crazy. The other piece to a new report I read from Redfin that came out late last week, for the first time, the average list sale that did happen, which is way down volumes way

down, is taking place at an average price below the list price. And not by much. The average house is selling about 0.1% less than list, but you had so long of so many homes selling above list price, even when the market softened, that you're now seeing less of a bidding war dynamic nationwide, whatever that's worth. Some markets are going to be different than others. But when you start seeing things, houses on the market a lot longer, and you start seeing things like, you know, again, the listings are up 8.2% last month versus last year, but closings were down 4.3%. So that's a reference to more inventory coming online and less transactions closing and presumably sellers not being able to get the price they want. Those are the things that generally mark the end of a seller's market and start to convert into more of a buyer's market.

We shall see a chart in the housing section at Dividend Cafe showing essentially the bullishness that homeowners have on where they expect home price appreciation to go from here being back up at the same level it was in 2007. No big changes in Fed market expectations this week. Fed funds futures still showing around a 35% chance of a rate cut in September. You know my view is that it's very unlikely. A 77% or 78% chance of a rate cut by November and a 95% or 96% chance of a rate cut by December. That's what's priced into the futures now. Oil was up over two and a quarter today, getting closer to the mid 80s. It's at $83.38. It's been sitting around the low 80s for a couple weeks. Really strong results in midstream energy, basically two and a half percent on the week last week. And just interestingly, MLPs are up 11 of

the last 13 Junes, the month of June. But the total midstream sector is only up 11 of the last 13 Junes, the month of June. But the total midstream sector is only up eight of the last 13 because Canadians have had a tougher time. But they are now up eight quarters in a row, the MLP midstream category. It's pretty crazy. And it's up 22% per year for the last three years. And it's up 22% per year for the last three years. But if you were to cherry pick to the COVID bottom or whatever bottomed in that week from hell in late March of 2020, it's up 470% since then, annualized at 51% per year.

A special hat tip to my friend Heinz Howard for some great research on some of that. The Against Doomsdayism Law No. 6 and the Seven Laws of Pessimism, the Law of Self-Effacing Solutions. One of my favorites that once a solution has been achieved, people forget about the original problem, only see the further problems. And what that kind of means is that there's a bad problem, something comes in and fixes it, but the thing that comes in has some problems around it too. And people will focus on the problems that were created, not recognizing that they were much less than the problems that had been fixed, than the prior problems.

Any solution has trade-offs and it comes in with some collateral damage. And we tend to focus on that and forget what the alternative had been before. This is human nature, but it's embedded in much of the negativity that is a byproduct of the laws of pessimism we're covering to help better understand human nature when it comes to their view of the world and economics, et cetera. A really great Ask TBG question. I'll let you go to the website to check out dividendcafe.com, giving you my explanation of jobs being created from foreign born people in America and what that has to do with immigration and so forth. There's some data

I provide that might explain it all. And with that said, we will tell you to have a wonderful evening. Brian will bring you the normal things tomorrow, Tuesday. I will bring you a very full Dividend Cafe on Wednesday. In the meantime, thank you for watching. Thank you for listening. And thank you for reading the Dividend Cafe. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC,

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