The Dividend Cafe - The Dividend Cafe - Monday September 23, 2024

Episode Date: September 23, 2024

Today's Post - https://bahnsen.co/3MTHck3 Monday Market Recap and Economic Insights: A Dive into Wall Street, the Fed, and Public Policy In this Monday edition of Dividend Cafe, David Bonson provides a broad overview of market activities and economic insights. The discussion includes the market's performance, the Fed's recent actions, and notable movements in sectors such as energy and healthcare. Commentary on the semiconductor and technology sectors' diverse outcomes is provided, along with a critique of the 'shiny objects' investment trend. Bonson also explores the shifting landscape of corporate debt origination, the escalating geopolitical situation between Israel and Hezbollah, and public policy updates, including U.S. legislative measures and election speculations. The episode concludes with thoughts on the coherence of labor market and economic health indicators, recent housing market statistics, and the potential paths for future Fed rate adjustments. 00:00 Introduction to Monday's Dividend Cafe 00:48 Market Recap: Uneventful Day 01:20 Sector Performance and Tech Analysis 02:58 Shiny Objects and Investment Lessons 05:49 Bond Yields and Corporate Debt 06:26 Private Credit Market Insights 07:26 Geopolitical News and Public Policy 09:33 Presidential Campaign Updates 13:03 Economic Indicators and Housing Market 15:35 Fed's Future Moves and Investment Decisions 17:44 Conclusion and Upcoming Special Issue 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 doing a real traditional Monday Dividend Cafe today, going around the horn with a little bit of every category. We have against doomsdayism. We have the normal market recap, Fed, housing, public policy, all of the fun things. I do want to encourage those of you that missed Dividend Cafe from yours truly, David Monson, on Friday about the Fed. I think you will find it to be a reasonably helpful synopsis of

what the Fed did and what the appropriate commentary is around it regarding the markets, the economy, and what we're expecting next year. Check out Friday's Dividend Cafe about the Fed. Market today was reasonably uneventful. The Dow opened up 70. It closed up almost 70. It did go down 100 a couple of times on the way and then just kind of leveled out. It hit an all-time high in the middle of the day. The S&P closed at an all-time high for the S&P 500, which was up today 28 basis points. The NASDAQ was up barely 14 basis points. So it was an odd day. You had energy as the top performing sector up 1.31%, but oil was actually down a tiny bit. Oil was up earlier in the morning a little bit, but it closed down a few cents, so about half a percentage point from where it had been. And that's a little bit

of a surprise to some who we're going to talk in a moment on some of the news events, but are paying attention to what is clearly escalating volatility in the Middle East. Didn't move oil prices, but the energy sector performed well today. Healthcare was the worst performing sector, and it was only down a quarter of a point. But when we talk about the S&P making a new all-time high, only 32% of semiconductor companies are even above their own 200-day moving average. 68% of semiconductors are below their 200-day moving average. The large cap 1,000, the Russell 1,000 technology sector, it's about 50-50 of the companies that are below and above their 200-day moving average. That is a very high dispersion of return, a very non-monolithic reality within the tech sector right now that there are some doing real well, some not, very mixed bag. But that the market

is holding up with this kind of democratic support that is not as top heavy as it had previously been is of encouragement and I would argue a little bit of a surprise, as tech is clearly not holding things up at this point. I've always made a distinction, by the way, a very important one, between big tech and shining objects. The shiny object craze is meant to be a catch-all pejorative term for things that are bought because they are popular and fun and exciting. And that can include big tech at different times. And there's been periods where it did.

But it is, shiny objects are a lot broader than one particular area and certainly much broader than one area that happens to be a monumental moneymaker in terms of real life corporate profits. I think of the most recent golden era of shiny objects is the 2020 to 2022 period where you just had an avalanche of companies that were somewhat equivalent to the late 90s dot-com era in terms of either being money losers, no path to making money, or made money, but it was so unbelievably separated from the way the company had been valued that it was just cartoonish. I have a link in Dividend Cafe this week about 23andMe, which was a company that went public

through a SPAC in this era, and at one point had a $6 billion valuation. It right now has a $7 million valuation, but that's a little deceiving because it has $7 million of cash in the bank. So it has a $0 valuation on the enterprise. And that's a brand name. That's a known company that had a product, had a brand, had a whole buzz. Shiny objects impede people's ability to see. By definition, the shininess gets in the way of sound investment decision. And the more companies end up in the graveyard of the shiny objects of that era, hopefully the more illustrations we have. First of all, for me to every now and then make jokes and make fun of things, but probably even

more important than that, to learn a lesson in insanity and to avoid the temptation next time around. By the way, there is a school of thought that says value is enhanced when prices come down. But of course, that presupposes that the company has staying power and profits and certain fundamentals that when you have a certain valuation on solid fundamentals and price comes down, value is inversely related to that. And that is axiomatic and true. When a company's going from 6 billion to zero in market cap, the lower the price, the greater the value does not necessarily apply. That's a kind of permanent problem with those shiny objects, eh? Okay. So the 10-year bond yield today closed at 3.75%. The yield was up two basis points on the day. And I mentioned already the top and bottom

performing sectors for the day. The one other thing I want to throw out, banks represented 30% of corporate debt. Banks had originated 30% of corporate debt just 15, 17 years ago, right around the time of financial crisis. It now is vacillating between 15 and 20%. That's a massive amount of market share for non-financial corporate debt that has gone from commercial banks to somewhere else. And in this case, to somewhere else's almost entirely private credit. Now that stat doesn't even share with within the non-bank lenders how much has gone from the high yield bond market to private credit. So the ongoing market opportunity in private credit, the advantages to investors, advantage to borrowers, advantages to issuers, and where

the risks are for each of those parties. It's a subject that's incredibly important to us. And I will point out, we have our annual Money Manager Week here in New York City next week, where Brian Saitel, myself, Kenny Molina, will be meeting, as we do every year, with all of our major portfolio managers and asset management partners. And we will be meeting with three of the major players in the private credit space. And this is an area of conversation we'll be talking more about. All right. I mentioned the top news stories. Obviously, this Israel Hezbollah matter is continuing to escalate. Israel attacking more and more effectively, shall we say, and those airstrikes continuing. The Pentagon today announced that they are moving more U.S. troops into the region, a dozen warships, fighter jet squadrons. So there is the appearance of an escalation and the preparation for potentially

more escalation taking place there. As I pointed out, the oil price is not reflecting that whatsoever. There had been a little bit in the most disingenuous media corners in recent days and weeks of fear and trembling about a government shutdown. And I think it's hard these days for the media to continue that narrative because they're now like 64 times in and it doesn't seem like they get the same traction on the 65th time they did on the 3rd and 4th and 10th. And so there's kind of a marginal utility at play. But nevertheless, you will be shocked to hear that Senate and House leaders came to an agreement last night and the White House will be expecting to sign something by next Monday that essentially just punts short-term funding through the election,

but not all the way into the spring of next year or even past inauguration. As it stands now, it would require some other additional funding agreement during the lame duck session of Congress after the election before the inauguration. Oh, by the way, that short-term funding agreement did not give the White House what they wanted in VA additional funding. They wanted like another $12 billion. It also did not give the House Republicans what they wanted about further requirements on proof of citizenship before voting. And so both sides left that out of a short-term funding agreement. It did provide $230 million of additional funding for Secret Service. Okay. On the presidential campaign front,

President Trump today, big speech in Pennsylvania, making hay about wanting to block Chinese Communist Party's acquisition of U.S. farmland, which depending on what sources you believe has become either a bigger thing than before or perhaps a very big thing. And the Biden administration announced that they are outlawing any use of Chinese software and internet-connected U.S. automobiles, which is a lot of U.S. automobiles. So a couple of different either proposed or actualized restrictions on China. And the other thing I want to bring up is it's on the political side, but because the outcome of the election has all these market and economic impacts, and I'm going to be talking

about it obviously in our special dividend cafe this Friday about the election. But I had alluded earlier to the possibility that this was the last time I brought this up is when President Biden was still in the race. And at the time, there was polling that indicated it was very possible that President Trump was going to win Nevada, Arizona, and Georgia. And President Biden was going to win Michigan, Wisconsin, and Pennsylvania. One congressional district in Nebraska by Omaha went to Trump, which it did in 2016. You'd end up at a 269-269 tie. If it went to President Biden, he would have won 270-268 in that scenario. Well, now you fast forward to where we are, and the electoral college hasn't changed a lot.

Vice President Harris is now the Democrat candidate. President Trump, it's close in all the polls. The lead is not as big as it was when Biden was still in the race. But there's certainly a plausible case that Trump wins Arizona, Nevada, and Georgia. And there's a plausible case that Harris wins Pennsylvania, Michigan, or Wisconsin. If she loses Pennsylvania, it's very, very, very, very, very, very likely that she's lost the election. And if she wins Pennsylvania, Michigan, or Wisconsin. If she loses Pennsylvania, it's very, very, very, very, very, very likely that she's lost the election. And if she wins Pennsylvania, it's very, very likely that she'll win Michigan and Wisconsin as well. However, the Republicans are looking to

pass legislation in Nebraska that would take away the congressional district attribution of their electoral college and that would cause them to vote the way 48 of the other states vote, the only other exception being Maine, which only has two congressional districts, which would be winner take all the way all 48 other states do it. And obviously in that scenario, President Trump would be winning Nebraska. So if they do go forward doing that, it would end up very likely being if he carried the South and she carried the Rust Belt, a 269-269 tie. Then it would go to the House of Representatives. So just do with that what you will. I mean, maybe she wins Georgia and it's all moot. Maybe he wins Pennsylvania and it's all moot. But a 269-269 tie is not at all impossible. And that's something to think about, along with my face getting run over by a tractor,

because that would basically be about equally enjoyable for things. Okay, I'm going to move on. A rule of thumb I want you to keep in mind here. When people talk about, well, we have a weakening economy, but a strong labor market, or vice versa, it's a strong economy, but a weakening labor market. The best interpretation is that they're talking about some ships passing in the night and that it's a transitory comet. It is fundamentally incoherent. There is no such thing as a strong economy of the weak labor market. A weak labor market is indicative and creative of a weak

economy. There's no such thing as a weak economy of the strong labor market. And if you have a strong labor market and companies are hiring, they're growing wages, then their forward-looking and assessment of present conditions is strong enough. You're hiring because they're growing wages, then they're forward-looking and assessing the present conditions is strong enough. You're hiring because you're what? Producing more goods and services. That's called economic growth. So labor and the economy tautologically are connected together. And any attempt to believe that these things are separated is at best case a very short-term data reporting tracking comment. It is not fundamentally possible. So now if you say that there's a certain moment in time where there's data that looks good in the economy and weak in labor or vice versa, the next sentence

has to be, and so what's going to reconcile it? If there's weak labor, strong economy, is the economy going to be getting weaker at the next round of reporting or vice versa? And right now, I think that the mixed bag continues, but the notion that we would just end up having a weak economy of strong labor or a strong economy of weak labor is absurd on its face. Okay. It's almost like a vocabulary lesson. Housing starts picked up a bit in August, 1.35 million annualized, and it was 1.24 million in July. July was likely affected by Hurricane Burl, if you remember. Permits reached a five-month high in August, and so new building permits hopefully are a leading indicator of more

construction, more housing supply. But sales of existing homes did decline in August 2.5%, and that's an annualized rate. They're down 4.2% from a year ago, and a year ago they were down quite a bit. The 30-year mortgage rate is now down about 1% from its high, but I think you're looking at a minimum of 3% that it needs to come down from its high for that to be a big factor in driving activity. So the conversation has gone from the Fed, will they, won't they, to are they going to do 25 or 50 basis points? The futures market right now is pricing in about a 25% chance that you get two 25 basis point, two quarter point cuts between now and the end of the year. About a 25% chance that you get two half a point cuts between now and the end

of the year. And then about a 50% chance, the highest probability, you get one of each, another 75 basis points. So whether it's November, December for 50, then 25, or vice versa, again, pretty irrelevant. I'm going to leave it there. A great question. I've asked TBG, how do investment decisions get made at the Bonson Group when you consider the so-called Buffett indicator, which is the total stock market capitalization? STBG, how do investment decisions get made at the Bonson Group when you consider the so-called Buffett indicator, which is the total stock market capitalization divided by GDP and that being an extreme high. And I made the comment in my response that

hopefully we would respond to it somewhat similarly to how Buffett himself does. How his name got attached to this indicator is another story. But for one of the largest holders of stocks in the world and in world history, to be asked if this rule that is attached to his name indicates that we should be selling stocks, he most certainly holding the gazillions of stocks that he holds would be a counter to that idea. Now, people would say, well, they've raised a lot of cash over Berkshire, but as a ratio of cash, they've always had a fair amount and don't really have a lot higher than normal in terms of the dollar level's higher because the full overall denominator is higher. But if what we want is some validation

that I think markets are expensive, you have it. I think based on a price to earnings ratio, there's no question the 21 times next year's earnings on the S&P is expensive and that the lion's share of that is captured in the technology sector. And I think you know how I feel about that. All right. There's a link against doomsdayism, the first ever commercial spacewalk. So for those who are just so down about everything, just remember we're sending people for fun, not from the government, not from the military, not from a university, just commercial to walk in space. I sent the link in Dividend Cafe. Check it out. I'm going to leave it there. Reach out with any questions. Get ready again for this Friday. Special election issue, Dividend Cafe. Very exciting. Thanks for listening. Thanks for

watching. And 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, 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 investment advice. Thank you. 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.

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