The Dividend Cafe - The Dividend Cafe Monday - June 10, 2024

Episode Date: June 10, 2024

Today's Post - https://bahnsen.co/4esr4m6 We cover a wide range of market and economic updates. From today's market action, bond market volatility, sector performance, and the top heaviness of the S&P 500, to significant geopolitical events and public policy issues. Also discussed are the implications of the Texas Stock Exchange movement, the recent jobs report, and trends in air travel. The episode concludes with insights into the private versus public company landscape and listener questions. 00:00 Market Overview 01:32 Bond Market Insights 02:26 Sector Performance 03:02 Top Heaviness in the S&P 500 05:35 Geopolitical Events 06:42 Texas Stock Exchange Movement 08:13 Jobs Report 09:14 Air Travel Trends 10:07 Commercial Real Estate Loans 11:21 Federal Reserve's Policies 13:00 Upstream Energy Stock Performance 13:34 Laws of Pessimism 15:04 Decline in Publicly Listed Companies 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. Hello and welcome to the Dividend Cafe. I am actually recording again from my apartment here in New York City where I recorded the Dividend Cafe on Friday, although I recorded Dividend Cafe Friday and then ran out the door, and then I just ran in the door, and I'm recording right now. It's become a convenient place to record quickly and leave, but actually a whole lot of action in between. But today's Dividend Cafe is a full one. There's a lot of different things I wanted to cover. Most of it I wrote

very early this morning, but let's get the stuff that happened throughout the day today out of the way first, just in terms of today's market action. It wasn't an especially dramatic or eventful day. The Dow was up 69 points, which is 0.18%. The S&P was up a quarter of a point and the NASDAQ was up a third of a point. S&P was up a quarter of a point and the NASDAQ was up a third of a point. But the bond markets action is a little more interesting. The 10-year today was up four basis points. So it closed at 4.46%. But the 10-year had been at 4.7% in late April.

And it got as low as 4.28% last week. And then on Friday, it did come up about 13, 14 basis points. Like I mentioned, it was up four basis points today. So bonds have sold off the last two days, but after a monstrous rally. Two things are true at once that seem very inconsistent one another, but are both very important understanding the bond market. And when you understand the bond market, you understand the whole world. One is that there is a tight range that has gotten set. And by tight, 425 on the lower end, 475 on the higher end.

You may think that isn't particularly tight, but it is. But then at the same time, an awful lot of volatility within that, bonds that will be at $4.50, go up to $4.70, come down to $4.30, go up to $4.50. So you're having 5, 10, and 15 basis point swings in the yields. And that just really has to do with a lot of what we call financialization, a lot of actors that are not taking a fundamental point of view, but are trying to front run where they see things going in the yield curve, where they see things going with the Fed and what that will mean for yield curve positioning. In terms of the market today, the top sector for the day was utilities. It was up 1.25%. Energy was up

3.25%. But then the bottom performing sector was financials, but it was only down 39 basis points. And you had a lot of stuff in the middle around the flat line. I did so much on Friday's Dividend Cafe and have been doing so much lately, as have a lot of other analysts, because there's so much to say about it in different ways to say it regarding the theme of top heaviness in the market. And so on Friday, I think I covered what portion of the S&P 500 right now the top three names were, just the one NVIDIA name is, the top five names, the MAG7, all of these different things. But let me add another data point in the mix here. The top 10 stocks in the S&P 500. So for those whose calculator is unavailable or don't know where the calculator app on your phone is, 10 names divided by 500 is 2%. You should know

that I can do that just without a calculator, just bragging a little here. The top 2% of the market is worth 35% of the market. So 2% of the names equal 35% of the market capitalization. In 1999, when we got to the top heaviest we'd ever been, it was 27%. So this is a simply stunning level of top heaviness. of top heaviness. And you can use 10, 7, 5, 3, or 1 names to make that point. How would we classify the divergence between an even-weighted and cap-weighted view of the market, this top heaviness? The S&P is at an all-time high, and less than half of the S&P is even above its own 50-day moving average. There you go. Okay, in the news this weekend, absolutely heroic story of the rescue of four hostages that have been held by Hamas since October 7th. The European Union results, if you look into specific countries,

President Macron's party in France took on some big hits, the Social Democrats in Germany. I think the Socialist Party in Spain lost to the Conservative Party by over four percentage points. So you had some significant right-wing moves. Now, again, by far and away, the kind of center of gravity still in the European Union is with a more centrist party hold, but with immigration and inflation as the primary issues, you saw quite a political move in some of these elections at various member European countries on Sunday. I'm not going to go through all of the dates and events here. I'm going to push you to DividendCafe.com. But my dear friend, Renee Ananow at Corbu Research provided a list that I have

bulleted in Dividend Cafe today of all of the significant geopolitical events on the calendar that lie ahead in just June and July. We're really just talking about six weeks or so from Putin state visits in China, G7, G20, NATO meetings. There's a lot on the calendar with a geopolitical bend that has the potential to be quite newsworthy in the next six weeks or so. I'd recommend you check that out. Another public policy element that we got quite a few questions about, and I'm going to address it not so much as an Ask TBG question, but more just in terms of the newsworthiness of it, is this talk about the Texas Stock Exchange. There is a TXSE movement. It has raised $120

million, including significant equity capital from such big players as BlackRock and Citadel. They still have SEC approvals to get. They still would want to begin listing companies as far out as 2026. It's a couple years away, but a lot of movement and questions have come in as to what this may mean. I think it's likely that they would allow dual listings to allow companies already listed with the New York Stock Exchange to list both with them and New York, but then really try to fight more for new listing business. But there isn't a lot of new listings these days, which actually is the subject of Ask TBG, but that's a coincidence. I'll get there in a moment.

I think it's, let me put it this way. I don't think it's a non-story, but I also don't think it's at this time anything earth shattering either. There's been other exchanges that come and gone. The New York Stock Exchange first and the NASDAQ second still are the duopoly of publicly listed companies. But this does seem to have some momentum. And Texas is a business friendly state with business friendly courts and judges. And there's a number of things that could happen here. Dallas has become a major financial center. So we'll watch the story. I don't think it has any impact to any investors

right now, but it doesn't appear to just be a headline or hype. There are some real players involved. I'll keep you posted. Economically, the big story of the weekend was the jobs report Friday, which is what pushed bond yields up on Friday. 272 000 new jobs created about 100 000 more than had been forecasted but the unemployment rate ticked up to four percent the labor participation force ticked down unfortunately from 62.7 to 62.5%. Average hourly earnings were up 0.4% on the month. They were expected to be up 0.3%. Private sector gains were the lion's share of those 272,000. It was about 229 of those 272. A good jobs report and better than expected, but again, still just little non-confirmed inconsistencies throughout the data. A lot of part-time jobs, household survey number was not as high.

So I still continue to find a lot of people responding to it based on their own political priors, which I just utterly refuse to do. political priors, which I just utterly refuse to do. Another economic point I want to bring up that I spent a little time with in Dividend Cafe today is TSA, the kind of checkpoint headcount, which I don't know of a better way to know who's really flying airlines than who actually goes through the metal detectors. Last I checked, you're not flying commercial if you're not going through that. And if you are going through it, you are flying, right? It seems pretty reliable. It is basically right now well above pre-COVID highs for travel. The 2021 numbers were quite low. Obviously, 2020, everything had been shut down.

22 still stayed low. It started picking back up. But that whole forecast about people are not going to fly again, and I made the analogy to when people said that after 9-11 has proven to be just as good of a forecast as that one was, which wasn't very good. $900 billion of commercial real estate loans are set to mature in 2024. It's about 28 percent of that in multifamily. Next year, it's closer to 600 billion.

Thirty six percent of that will be multifamily. Second place is office. And then there's a real small amount in industrial retail, hospitality, other commercial real estate asset classes. Multifamily is the big one. I expect it will be a significant hit to margins because I don't think there's a huge incentive for a lot of the lenders to multifamily to amend and extend because I think there's mostly positive equity and positive cash flows and reasonable fund, not great, but reasonable fundamentals in multifamily. And so the banks are going to refinance and reset rates where they can, where office, I think you're going to see so much more amending and extending because there isn't any point in foreclosing where there is going to be distress.

And we're watching this closely. And who else I believe is are a bunch of PhDs that work for the Federal Reserve. There's no chance that the Fed is going to raise or cut rates at the July meeting. There wasn't a chance before the jobs number on Friday. But nevertheless, when you get five different media outlets saying, now there's no chance that the Fed's going to do something because of a strong jobs report, it A, dishonestly pretends like there was a chance they were going to do it before. And then B, it reinforces in people's minds this narrative about strong jobs being inflationary. And so there's two different things that bug me there. The first one is just an annoyance. The second one is really dangerous as a matter of policy and economic understanding. The other thing I did today in Dividend Cafe

on the Fed is put a chart up because I want people to understand where velocity picked up a little last year, having to do with the reverse repos being drained out of the system. We were up to about $2.5 trillion, and we've gotten almost down to half a trillion. There's close to $2 trillion of reverse repos that are on deposit with the Fed that have come out. And that money has flown, in a lot of cases, into assets. And I think velocity, when it is just looking at the turnover of goods and services, how many times goods and services are being bought and sold,

I don't think you've seen a big upward move in velocity. But when you include money coming in like this into asset prices, I do think that increases velocity. And so the chart here shows that correlation. Upstream energy stocks were hit last week. Crude oil itself was down over 2% of the week. It had been down more earlier in the week. It actually was up over 3% today. But I just want to point out that MLPs were up nearly 1% last week, and the midstream sector, even with C-Corps, was about flat. So still not only a decorrelation between midstream and commodity prices, but midstream and upstream. And that speaks, I think, to the investment fundamentals around midstream right now. I'm going through the seven laws of pessimism from Martin Baudry in my Against Doomsdayism section. And we went in the first week with the velocity of bad news, how quickly bad news spreads.

And we have talked about, hold on, excuse me. That's the number two. The first week was the invisibility of good news relative to the immediate visibility of bad news. Then the second week was the velocity of bad news, how quickly it spreads. Today is what he refers to as the law of rubbernecking, which is the more gruesome the news, the more we lap it up. There's a human nature element here. I don't think it's sadistic, but I do think it's very sensationalistic. And it really does play into our view of risk reward as well, that we're drawn to these things that have big numbers. And a lot of the positive news is not when you have a major earthquake, tsunami, it hits tens of thousands, hundreds of thousands of people at once.

But when you have growth in literacy over a century, it's also hitting pockets of people over a long period of time. There isn't the same sensationalism, both in magnitude or speed. And that just lends itself to bad news, capturing more headlines and capturing more of our mental imaginations. The question to ask TBG today had to do with why we've gone from 8,000 publicly listed companies in the last 25 years to 4,000. And there isn't any real controversy about this, to my knowledge. There might be controversy as to what to do about it or if anything should be done about it. I don't know. I always assume there's somebody out there with some really bad idea for something. But why it's happened is a no-brainer, that there just simply is a significant evolution

in options in private markets for monetization, for liquidity, and for just access to capital, where public markets often in the past had been one of the only ways companies could monetize founders, monetize early investors, create liquidity and exit, and then, of course, do secondary public offerings that generated primary capital for the firms that were in need of growth capital, where now the massive growth in private debt, private equity, venture capital, and other forms of financial market innovations have made it much less necessary to ever go public. And why go public if you don't need your stock as a currency when it invites so much more regulation, so much more disclosure, so much more liability, inconvenience, et cetera. I think that what it's done is made the valuation and the attractiveness

of buying IPOs very unattractive. Companies are doing, when they used to go public at, let's say, a D round of fundraising, they now go public at a G or H round of fundraising. And a lot of value creation took place within various steps of being a private company. So by the time they go public, a lot of the great money has already been made. And that was not always the way it was. I don't know if that's ever going to change. I don't know. I never say never in my business, but it has no real impact the way we view things. It just changes some of the opportunity set in the timeline and the way you think about liquidity and exit strategy within private markets. Great question. Thank you for that, Fred. Okay, I'm going to leave it there.

We've covered a lot of ground. I appreciate the long Monday opportunity to go around the horn with you. We'll have another market update and our normal Ask TBG questions and what's on mine and Brian's mind over the next few days. And I'll see you back at the Dividend Cafe on Friday. Thanks so much for watching and listening and reading the Dividend Cafe. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, and 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 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 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 Thank you. data and information referenced herein. The data and information are provided as of the date reference. 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 Thank you.