The Dividend Cafe - The Dividend Cafe - Monday September 16, 2024

Episode Date: September 16, 2024

Today's Post - https://bahnsen.co/4eJ46qf Monday Market Update: Fed Policies, US Steel Deal, and Economic Trends In this episode of Dividend Cafe, David provides an update on the current state of the market, touching on various topics including public policy, the Federal Reserve, housing, and the economy. Key highlights include the proposed acquisition of US Steel by Nippon Steel and the Biden administration's stance on blocking the deal. Market performance is discussed, with the Dow Jones hitting an all-time high, while tech stocks underperform. The host also covers trends in bond yields, foreign investment in US Treasury debt, and current US corporate earnings projections. Additional topics include the New York Manufacturing Index, the rising number of 401k plan participants, and mortgage-free homes in the US. The episode wraps up with thoughts on the state of the office market, particularly in Singapore, and Amazon's policy change requiring office staff to return full-time. Other subjects include the Fed's upcoming meeting, the global reduction in abject poverty, and the role of venture capital in contrast to dividend growth investing. 00:00 Introduction and Market Overview 00:24 U.S. Steel Acquisition Controversy 01:45 Market Performance and Fed Updates 03:06 Bond Yields and Foreign Investment 06:28 Economic Indicators and Housing Market 08:08 Office Market Insights 10:01 Fed Meeting and Rate Cut Speculations 10:49 Global Poverty Reduction 11:36 Dividend Growth vs. Venture Capital 13:09 Conclusion and Upcoming Updates 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 Monday edition of Dividend Cafe. We are right in the middle of September and I want to give you the normal update as to all the things going on in the market with public policy, with the Fed, with housing, with the economy, et cetera, et cetera. Look, in the written version of this today, DividendCafe.com, Monday edition, I ended up going into a very long screed about the U.S. Steel, the Japanese company, Nippon Steel, their proposed acquisition. It's a

big public policy moment because the Biden administration has said that they want to block the deal. They've now said in the last couple of days that they may delay blocking the deal, which would effectively probably just punt it until after the election. And then we have two presidential candidates that have both said they want to block the deal. Current Vice President Harris, former President Trump, both say they're wanting to block the deal. Other than that, I don't know a whole lot of people, myself included, who are against the deal. And so what I did at the Written Dividend Cafe is I ended up writing a big explanation as to why I'm supportive of the deal and what I think is sort of the market-based free society argument in favor of this particular deal. It's an economic

argument and gets into the reality of the capital needs of the company. It's not a political position. But anyways, I'm not going to go through all that here on the video or the podcast now. I just want to let you know that that's there at the Monday edition of today's dividendcafe.com if you're interested. As far as the market goes today, the Dow closed at yet another all-time high. It was up 228 points. At one point earlier this morning, it had been up about 300 points, stayed up throughout the day. And that's in the day when technology was down quite a bit. Tech was the worst performing sector, down 1%. The NASDAQ closed down about 50 basis points itself. The S&P was barely up. And then the Dow was up over half a percent, 228 points. So you had a big day from

both financials and energy, which were up 1.2% each. So just one of those days, I call it a 2022 day, where certain things in those types of sectors did quite well and the tech side did not. Interesting, as we get ready for the Fed meetings of Tuesday and Wednesday this week, it's now been 146 days since the Fed last hiked rates. And so that kind of time period between a rate hike and then the next rate cut. This will be the second longest time period on record, but by far the highest return for markets of any period between a hike and then a cut. This has been the best performance in markets between those two. We're looking at a pretty good period of time. And I think that it will end up being something that we'll have to write about more as to why that is. In terms of the 10-year bond closed today, 3.62%. That was down three basis points. Just think about

that. The two-year yield is down to three and a half. The 10-year, 3.6, down meaningfully from where they were just a couple months ago. Obviously, this means that returns for bond investors have been positive. It's pushed bond prices higher as yields drop, obviously, but it really does beg the question, aside from Fed expectations, what are the growth and inflation expectations causing this downward pressure on bond yields? and inflation expectations causing this downward pressure on bond yields. I think you know my answer. Foreign ownership of U.S. Treasury debt, that is a discussion that gets a lot of play, what it means, what it doesn't mean in the context of interest rate prospects, what it means for currency. I think, though, one has to wonder if there is a decline in foreign investor appetite for U.S. treasury debt,

which I don't see a lot of, why people think that speaks to decline in U.S. dollar appetite when foreign appetite for U.S. corporate bonds, which are denominated in U.S. dollar, is so robust. It would seem to me that there's pretty high confidence from foreign investors, at least on a relative basis, which is all that matters here in American economic prospects when you consider the high foreign purchase of U.S. corporate bonds. My final market comment, U.S. projected earnings right now forward multiple at 20.1 times earnings at the $280 earnings level of next year. And then as far as the possibility of it not happening, it would mean yet further still margin expansion off of what has already been a rather robust expansion

of corporate earnings margins. That could happen. That earnings number could happen as well. I am skeptical. I think that there's downside risk to that projection. But even apart from that, even if it were to happen, you're still talking about an over 20 times multiple in the S&P. that. Even if it were to happen, you're still talking about an over 20 times multiple in the S&P. In terms of the news this weekend, we're aware of the second assassination attempt on President Trump's Secret Service, this time being able to get involved early on in the suspect was caught and apprehended. That certainly dominated the news cycle on Sunday. I've already mentioned the change potentially in the Biden administration's approach to the U.S. steel acquisition by the Japanese company Nippon Steel. However, I'm not going to go through my 10 points that are at DividendCafe.com weighing out considerations as to why the deal makes sense for the U.S. considerations.

The New York Manufacturing Index came out this morning. This was a big surprise. Now, these indexes are very volatile and are subject to a lot of reversals. So I don't put a lot of weight into it until we get three months in a row. And I say that about a lot of data points. But we were expecting a contraction of about 4.0. It had been down 4.7 last month. It ended up expanding 11.5. So a huge beat, largely driven by new orders. Again, it's one month. We'll wait and look at it again next month. The most interesting economic factoid I read, I always am reading a bunch of this stuff over the weekend, and I try to incorporate some of it in the Monday

Dividend Cafe where appropriate. There are right now 90 million people in the United States who have an active 401k plan or defined contribution plan. And there were 30 million in 1984, 40 years ago. There were 30 million in 1984 that were participants in a defined benefit plan, a pension. There are 10 million now. So the pension plan participants went from 30 million to 10 million. The 401k went from 30 million to 90 million. Just thought it was interesting. Another interesting stat to share with you, very important as we think about the overall office picture, 39.8%, if you don't

mind, we'll just call it 40%. 39.8% of owner-occupied homes have no mortgage. It's the highest in history. It was at 32% just over 10 years ago. So a significant increase in 100% equity homes with no debt and no carry costs, again, adding to the reason that higher interest rates have not been as big of a factor in the housing market because a higher interest rate doesn't affect someone who isn't paying any interest at all. Switching gears to the office market, which is something I do like talking about in Dividend Cafe on Mondays from time to time or other elements of commercial real estate. I was struck, I need to unpack it more if you're interested in more granularity, but I read a kind of high level

report about how robust the office market is in Singapore. And it got me thinking, if one believes that the problem with the asset class in commercial real estate of office is that the entire concept is obsolete and no one is going to work in an office anymore. And there's other factors that make it even worse for some components and a little better for others, but broad-based, the office market is in a state of secular decline. It really does make you wonder why it would not be the case in all cities, let alone a very cosmopolitan and robust economic growth city like Singapore. Well, my view is that office is not obsolete and that Singapore happens to benefit from being a largely class A office space and not having

a huge glut of antiquated class B and class C space that some American big cities have, and not dealing with old cities that have been totally turned upside down by various factors in the last several years. But then even that broader based point about whether or not people are going back to work, I put in a picture from BBC of Amazon announcing an end of hybrid, of Amazon announcing an end of hybrid, requiring all office staff to be back going into next year, five days a week, an ending of their hybrid policy. So do with that what you will. Yes, the Fed meets on Wednesday. It looks like, again, I'm going to be wrong. Futures market is now really pivoted to being advantage half point cut this week, not quarter point. As of this morning, the futures and the Fed funds rate were pricing in a 59% implied

probability of a half point cut this week. And so obviously a 41% implied probability of a quarter point cut. That 59 is not conclusive, obviously, but it's interesting that the momentum has moved that way. We'll see what they do. The PAL announcement, the FOMC announcement followed by the PAL press conference will take place on Wednesday of this week. Midstream up another 1.2% last week. Oil closed today at $70.50, up about half a percent. The against doomsdayism section is back. I've been a little remiss in finding weekly content for that, but it's not for lack of material. I'll tell you that World Bank just updated their report a few days ago. 690 million people in our world living in abject poverty. That's 690 million too many, obviously. But that number was 1.1 billion in 2010, so just over a decade ago.

And so it's down 400 million less people in abject poverty in 14 years. And it's down over a billion since the turn of the century. In 24 years, there are a billion less people living in abject poverty in terms of the World Bank data. I think that's wonderful. Then a question about how we think around dividend growth investing for someone who loves the concept, believes in it, but is themselves engaged in venture capital. And do I see that as contradictory? And I want to be very, very clear, is contradictory. And I want to be very, very clear, nowhere in our worldview at dividend growth is it set against other things that are vital in capital markets, such as private market investing, including venture capital. Now, it invites a totally different objective, a totally different

risk profile, a totally different liquidity profile. We believe dividend growth investing is extremely appropriate at different weightings in an asset allocation for almost all investors, not all, but a very, very high portion. Venture capital might be something that's appropriate for a very, very small amount of investors. But the fact that it has a different risk reward characteristic and a different objective, it doesn't make it illegitimate at all. It makes it different in the way it is used by an investor. The role of venture capital in our overall financial markets is vital.

We are big supporters. We utilize alternatives, private markets, venture capital throughout our investing process. It's just that it isn't the core kind of anchor position of a portfolio from income, liquidity, risk reward trade-off standpoint that dividend growth is. So it's just asking us to compare apples and oranges in this case. All right, I'm going to leave it there. What a wonderful Monday it's been here in beautiful New York City. Fall is upon us. Reach out with any questions. Have a great Monday night. We'll be with you throughout the week. Look forward to your main Dividend Cafe on Friday as well. Thanks so much. The Bonson Group is a group of investment professionals

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