The Dividend Cafe - The Dividend Cafe Monday - October, 14, 2024

Episode Date: October 14, 2024

Today's Post - https://bahnsen.co/3Y9gI2S In this episode of Dividend Cafe, David provides an analysis of the latest market and economic trends. The discussion begins with the unusual trading day where the stock market was open but the bond market remained closed, highlighting a 200-point rise in the Dow and strong performances in the technology and utilities sectors. Attention is given to Broadway's return to pre-COVID attendance levels amidst high ticket prices. David explores the importance of Treasury Department personnel, U.S. debt structure, and its ramifications, along with insights into the producer price index and household debt levels. The housing market remains stagnant, with predictions of mortgage rates staying around 5% until early 2026 and minor Fed rate cuts expected soon. Additionally, there is a focus on the dip in oil prices despite OPEC's reduced demand forecast and the performance of energy stocks. Listeners are advised to visit DividendCafe.com for more detailed analyses on the yield curve, recessions, and the critique of doomsday predictions. 00:00 Welcome to Dividend Cafe 00:27 Market Observations and Insights 01:34 Daily Market Performance 02:49 Sector Performance Highlights 03:12 Public Policy and Economic Data 03:42 Treasury Department's Role in Debt Management 05:04 Understanding Treasury Notes and Federal Debt 05:53 Impact of Fed Rate Cuts on Deficit 06:30 Political Tribalization and Election Trends 07:44 Producer Prices and Household Debt Insights 09:07 Broadway Show Attendance and Housing Market 10:24 Fed Rate Cut Expectations and Oil Market 11:15 Final Thoughts and Resources 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 Monday edition of Dividend Cafe. I am your host, David Bonson, and I am so excited to be in our Newport Beach studio in our offices here. It's been quite a while. I've been on the East Coast. I'm here in Newport for a couple of weeks.

And I think we have a pretty full dividend cafe. I'm rather proud of what I've written in here over the weekend. I will start with the same caveat, though. It's a very odd day, and I'm somewhat critical of this, when the stock market is open and the bond market is closed. And I would add the banking system is closed as well. So you effectively have a government holiday where the stock market is open. It only happens twice a year.

I think there is a risk to it. I don't think it's substantial. I don't think there's any catastrophes that we can document that have come from it. But I think that there is marginal distortion that comes when multi-asset players are only able to trade in equity and not in interest rates or in bonds or in fixed income that is kind of interchangeable and within the full context of different portfolio activity. There's actors who are hedging and just different trades get put on differently. Different trades don't get put on that otherwise would. It's just something is not totally right or normal about it. And so all that to say, it was one of those days today.

Now, the Dow opened up today down 100 points and then began rising almost immediately and ended up closing the day up 200 points. But really, after the drop at the open, for the next two and a half hours, it just climbed right higher. And then for the remainder of the day, it kind of just flat lined up around that plus 200 level. It didn't close really all that far off of its high on the day. The S&P, so that's about half a percentage point

for the Dow. The S&P was about three quarters a percentage point. NASDAQ a little more than that. Look, there was a big rally on Friday as well. And you saw a breadth that was pretty impressive with the S&P, 5 to 1 advances, decliners, advancers to decliners. But the Russell 2000, which is the small cap equity index, had basically 9 to 1 breadth, which is really unheard of. I mean, very, very strong advanced decline action in the small cap index. So again, just an overall positive environment for risk assets. The 10-year today closed at 4.09% because that's where it closed Friday. And I just ended up telling you that the bond market was closed today. So the top performing sector today was technology at 1.36%, utilities right behind it at 1.3%. Then the worst performing sector was technically down. So you didn't get

an 11 for 11 positive, but energy was down 0.1%, so barely down. And it was the only negative performing sector. The Dow closing today at another all-time high. So let me just go through our normal categories from public policy to economic data to the Fed and all the things. First of all, on the whole, okay, let me start over. The personnel is policy point I made a number of weeks back when I did our special edition election issue. The treasury secretary and the people that staff a treasury department are going to matter regardless of who wins the presidency. One thing that I would say is going to be quite important will be the way in which they think about the structure of the debt. The Treasury Department doesn't have a lot to do with

how much money gets borrowed because Congress spends money and Treasury has to figure out a way to pay for it. And you're really talking about the legislator who's spending money. What the Treasury Department has a lot to do with is how the debt that is taken on to meet the level of spending that is being required by the legislator, which is really the spokespeople, the spokesmen and women for the people. But the treasury part has a lot to do with how the debt gets structured. And for example, right now, 90% of our debt is at a fixed rate and only about 10% is at a variable rate. And most of that, not quite all, but most of the floating, the variable is in what we call TIPS, treasury inflation protected securities, TIPS, Treasury Inflation Protected Securities, where the amount of money that it costs to borrow is variable around where the inflation rate goes. It fluctuates. And I think TIPS are one of the greatest economic inventions and financial markets ever concocted, but it represents a big dollar

amount of activity, a couple trillion dollars, but it isn't a huge percentage of federal borrowings. Now, when you look at the 90%, 22% are in what's called T-bills, which are very, very short-term. So those rates are constantly resetting. But then 50% are in what's called T bond, excuse me, T, I say this backwards all the time, treasury notes, where the maturities are about two to 10 years, so kind of more intermediate term. And it is only 16% of total federal debt that is in a locked rate that is longer term, 10 plus. So those 20-year maturities, those 30-year maturities, is only 16% of total debt. And I think this is suboptimal. I think it'd be much better even if part or portion of the debt was locked at a slightly higher borrowing cost for financial

markets to know it was fixed and that there wasn't a constant resetting of debt that was at a higher price. Now, I say all that knowing that the Fed is in the midst of cutting the short-term rate, and this is one of the biggest things that's going to move the deficit down next year, is depending on how quickly they lower rates and how much they lower rates, having that amount of money that is two years and less in maturity means that there's a significant amount that could very well end up being rolled over into lower than the price it is now. And so that may be the whole point here

as to why rates are coming lower is to reduce some of that deficit pressure. It's certainly a big part of what I believe their calculus to be. Just kind of interesting comment on the tribalization in our political atmosphere that I talk about a lot. I found this data point to be quite interesting as we get closer to the election, that there were seven states in 1996 where the outcome of president was 20 percentage points apart or more. There were 19 states like that in 2020. So many of the blue states have gotten bluer and so many of the red states have gotten redder

that it has made these battleground states, the real crux of where elections are determined, those happen to be so tight that that's where you get this. But again, just having not merely that there are certain red states that are clearly going to go red or blue that are going to go blue, but that they are going to go by such a wide margin, changes the need for campaigning there for policies that make sense across the board. It limits the kind of national political spectrum in a way that we should not be surprised to exacerbate some of the tribalization. On the economic front, the PPI number came out on

Friday and it was unchanged, 0% move in producer prices month over month. Year over year, it's down to just 1.8%. But again, I want to keep pointing out that intermediate processed goods and unprocessed goods are at outright deflation. Intermediate unprocessed goods prices are down 9.5% from where they were a year ago, processed down 2.7. So in goods for consumers and producer prices as to non-processed goods, we are basically at 0% or less inflation into outright deflation. It's, of course, services, housing, messing stuff up. A very interesting data point to share, stuff up. A very interesting data point to share, household debt relative to income, to disposable income, was about 138% pre-financial crisis. It's at 90% now. So the household sectors have all delevered quite a bit since financial crisis. We know what kind of a bubblicious environment it was

for households before the crisis. But then, of course, the household sector delevered while the government level relevered and then some. And so you've just sort of switched places in that amount of financial leverage. The actor holding it moved from the household to the government. Then anecdotally, Broadway show attendance is now tracking back to 2019 levels with the highest ticket prices they've ever had. And yet the attendance is well above the 2022 and 2023 level back to pre-COVID. Obviously, 2020 and 21 were out through the closings and lockdowns and all that. An interesting point to make on housing.

I am one who does not believe rates need to go down to the two, three, 4% they were to start to get activity going again, but that they're not likely to produce unthawing of the housing market still above 6%. And so there's some threshold at which I believe sellers start being willing to move. at which I believe sellers start being willing to move. The Fannie Mae projections that came out indicate that they see rates staying into the fives into all through 2025 and even in early 2026. So we may be a year and a half away

till you start seeing mortgages in the 4% and some thawing of the market. I don't know that it'll take that long and I don't know what it will take to get sellers to start moving, but there's very limited activity. Rates are not going to come down violently in the housing market. And it's important to note. Right now, quarter point cut next month is 90% expected. A quarter point cut the month after that is 84% expected. The idea of two half point cuts is at 0%. The idea of two 0% cuts is at 0%. So we're kind of in the middle there, a quarter point at both meetings for the Fed. Oil down 2% today, closing back down to $74.

Higher than the low 70s it had been in, but higher than the high 70s it had been in. higher than the low 70s it had been in, but higher than the high 70s it had been in. OPEC reduced their forecast for current oil demand, expecting oil consumption to be, again, it's still 1.9% higher from prior levels, but that rate of growth has come down three months in a row in OPEC productions. Big week again last week for the whole energy sector. Oil was up, energy stocks were up, midstream up energy sector. Oil was up, energy stocks were up, midstream up another one and a half percent. Please, please read DividendCafe.com today, the Monday edition for the Ask TBG about the yield curve and recessions, and the Ask TBG about against Doomsdayism with two links that I absolutely love. So, so happy to be with you here

from Newport Beach. Reach out with any questions anytime, Questions at thebonsongroup.com. Very much look forward to the big week ahead as we are coming now here into the middle of October. Thanks for listening. Thanks for watching. Thank you for reading The Dividend Cafe. 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 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 investment advice. 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

circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor for any related questions.