The Dividend Cafe - The Dividend Cafe Tuesday - May 28, 2024

Episode Date: May 28, 2024

Today's Post - https://bahnsen.co/3KhwHpc A special Tuesday edition owing to the Memorial Day holiday. The podcast covers a range of topics starting with a market recap, touching on the industrial and healthcare sectors, and explaining the unusual trading patterns in the Dow, Nasdaq, and S&P 500. Financial intricacies such as market breadth and credit spreads are discussed, along with the curious valuation metrics of various sectors. The housing market trends, including mortgage rates and foreclosure statistics, are highlighted. Speculations on future Fed rate cuts are discussed, emphasizing the likelihood of cuts being delayed until after the presidential election. David also explains the firm's approach to utilizing outside money managers for specific asset classes. The episode wraps up with a preview of upcoming segments and 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. It isn't Monday because of the Memorial Day holiday, but you're getting on Tuesday the Monday edition. So much to say today, kind of an extra long against doomsdayism, a lot on housing I want to cover, and even a kind of really extra long Ask TBG. So I'm going to try to go through all of it, even for the podcast listeners and video watchers.

But of course, inside Dividend Cafe is where you get some charts and other fun things like that. Also links, there was a fair amount. I actually had a couple of interviews before I even left my apartment early this morning. And Brian Seitel did an interview on Cheddar TV on Friday. So all those links are there at Dividend Cafe in today's entry. Check it all out. Market opened down 100 points today, and it worsened. About halfway through the day, it took another leg down and was at one point down over 300

points. It made about 100 of that back. The Dow closed down 216, but the S&P 500 was totally flat, and the NASDAQ was actually up over half a percent. How do you get the Dow down half a point, the NASDAQ up half a percent, and the S&P flat all in the same day? First of all, it's not very common. But second of all, the way you get it is because most of the pain in the Dow is in two sectors, the industrials, which were down today about one and a quarter, and healthcare, which especially pharma was down one and a quarter. And that is a byproduct of just where the concentration of sell-off was.

And there's more in the Dow than the NASDAQ. And of course, the highest performing sector was energy, which was up one and a quarter, actually 1.3 something. And so that's obviously most felt in the NASDAQ. Energy was up over 1%. Oil itself was up over 3%. We're going to talk more about that in a moment. But let me point something out that is relevant to what we think about the markets here, because we know the month of May has seen a big rebound across market indices relative to where things were in April. Everything dropped in April. Everything's come up And yet, it's not with the breadth in markets that we had been seeing, particularly since about last November through the whole first quarter of this year.

When we were done with that November-December rally that ended 2023, 92% of the companies in the S&P 500 were trading above their 50-day moving average. By the end of March, we had a pretty good quarter up across market indices. 85% of the S&P 500 was still above its 50-day moving average. As we sit here right now, even with the rally that we've seen in May, only 50% is above its 50-day moving average. So while April took everything down, May has seen market indices come up, but it's gone back to a more top-heavy nature. So do with that what you will. I want to point out, too, the market was

down 1,000 points last week. It had been up 1,000 before that. And I talked about this in Friday's Dividend Cafe, the up or down 1,000 points every week or two weeks that we've kind of seen for a little while now going back and forth in either one or two week period. And yet credit spreads remain at just 300 wide. So when you look at the high yield credit spreads, you're talking about 300 basis points, which is very low and has not widened out as stock prices have fallen further, which you normally might expect. So you're not getting confirmation in credit markets of some of the issues we saw in stock

markets last week. When both move together, meaning credit spreads go wider and stock prices drop and that both happens at the same time, that might be more validating and confirming than one happening and not the other. All right. Other market stuff before we get rolling with some other fun things. This is just surreal. I typed it myself, and even as I read it,

I can't really believe what I'm reading. The entire energy sector in the S&P 500 is trading at 1.3 times revenue, 1.3 times sales. The entire consumer staples sector is trading at 1.4 times sales. The MAG7 is trading at 7.3 times sales. And without getting into particular names, there are some companies trading at 35 times sales in the MAG7. On a trailing 12 basis, which is not in my mind, I've very much become a forward earnings multiple analyst. I care far more about what multiples are showing for the year ahead versus the year behind. Even though I always want to know both, I accept that for legitimate, predictive, analytical valuation knowledge, the forward is more important than the trailing. Critics of my point of view would say, how do you know what the forward

will be? What if you get a bunch of downward revisions? And I fully agree. But I'm trying to evaluate, if you get downward revisions, then that is what is going to cause the market to drop, If you get downward revisions, then that is what is going to cause the market to drop. It's not what the valuation is. It's the actual earnings itself. I am looking for valuation stories where forward earnings are assumed. And that's sort of the point I've been trying to make about valuations now, is that we're trading over 20 times if you assume forward earnings are met or potentially even beaten. So anyways, why did I bring this up? The trailing earnings multiple for the technology

sector is 40 times. That's all the companies in the technology sector in the S&P 500. that's all the companies in the technology sector in the S&P 500. The trailing multiple for the S&P itself is over 25 times. The trailing multiple for all the companies in the energy sector is 13 times. I do not mean to indicate that the energy sector and the tech sector are supposed to be trading at the same multiple when it comes to earnings. They're obviously not. And there is obviously faster earnings growth for technology than energy. There should be a disparity. Should the disparity between the whole market and tech be that big? Should the disparity between energy and the whole market be that big? Should the market

itself, its full multiple and absolute basis be that high? I would answer no to all those questions, but nevertheless, I share the data with you for your own absorption. Market sentiment in the, I think I shared the AAII number last week. The Citi panic euphoria model is at the highest level in over a year. And I mean that on the euphoria side, not the panic side. Okay. In the news, Hess approved the shareholders officially voted today in favor of the acquisition by Chevron. That's been long expected for a while.

And then I think you're going to hear about this every other news source, so you don't need to hear about it from me. But lawyers did begin making closing arguments today in the Trump case playing out here in New York right now. And I believe it will go to the jury to begin deliberations by the end of the day tomorrow, a worst case on Thursday. So obviously, there'll be a lot of noise around that whole story. On the economic front, only a little bit. By Friday, we're going to get some GDP revisions, and we're going to get the PCE, the personal consumption expenditures, inflation data from the prior month. But today, durable goods orders were up just 0.3% in the month of April, not a bad print in durable goods. And then the Conference Board

Consumer Confidence Index, which is different than the University of Michigan Consumer Confidence Index, it actually flew higher in May. And you may recall the Michigan number had seen a drop, and I don't care about either. But I'm sharing with you just because of the conflicting data point. All right, let's talk housing for a little bit, shall we? A few tidbits that I think are quite interesting. I've shared them before. 40% of American homes right now do not have a mortgage at all. That's the highest we've ever had.

30% of homes that are selling are selling above their list price. So demand is still exceeding supply when a transaction is able to happen, but transaction volume is very low. Foreclosures. This is fascinating. Foreclosures had reached $2 to $3 million per year each year from 2008 to 2012, as we were in the midst of that nasty financial crisis, and where you had such a substantial amount of upside down equity and people giving keys back and banks going through foreclosure processes. Foreclosures are essentially at zero now. It's not literally zero, but by a statistical comparison, it basically is the same as zero. And obviously, the explanation for that is that people do not give away their homes.

They do not give keys back when they have equity. If they need money or something's changed and they have to get out, then they sell. And when there's equity, there's not a foreclosure. They're getting some net money, but it's very rare to have foreclosures when there's equity, and that's what we're dealing with right now. And then in terms of that mortgage point, of the 60% of homes that do have a mortgage, 45% of mortgages are below 4%. And I believe that number is still something in the 60s for those that are below 5%. And so you really still have a significant amount of people that own homes not paying the higher mortgage rates that we've seen in the market over the last couple of years. I use Austin, Texas because it was a story

of a report I read over the weekend as an example right now about the supply-demand issues in housing. Austin's inventory, available homes for sale, is up 442% over the last two years. There are currently 9,000 homes for sale in Austin. It was about 17 a little over two years ago. So you are really about to go into a buyer's market in Austin. Prices are down 17% single family residents from where they were at the peak. So you could say, well, this seems kind of unhealthy in Austin. But again, it was one of the hottest markets in the country. There was such a high demand, such a high population growth, job growth, healthy wages, a lot of people moving their favorable tax and regulatory environment. It pushed demand up and then builders responded by building. And then by having supply come in, it was able

to stabilize the market. And you see prices dropping from what was a very elevated level. And this is the supply demand balancing process at work. I do not see prices down 17% from their peak in Austin as a negative. I see it as a positive and a positive that is brought about from the demand side being met from the supply side. And that's basically the chain of events. Demand surged. Builders responded by building homes. Then demand exceeded supply.

Prices had surged. Supply caught up with demand. Prices had surged. Supply caught up with demand. Prices corrected. This is what we're talking about that needs to happen on a national basis. Single family home sales on a volume basis declined 4.7% month over month in April. And let's see, from the year, they're down 7.7% versus a year ago. And a year ago, they had dropped significantly. So I mentioned Austin.

It was a couple other Florida cities that have seen the most pronounced drop in prices as of late. But the highest home price appreciation out of 60 major metropolitan markets in the United States over the last 12 months, Indianapolis, excuse months. Milwaukee is first up 11.8%. Kudos to Laverne and Shirley. Indianapolis was up 11% and Providence, Rhode Island just behind that at up 10.5%. Finally, housing, the last factoid I want to share, very relevant to our overall conversation. The last factoid I want to share, very relevant to our overall conversation. Since 2022, it was about the middle of the year that this shifted.

It had been forever since it had been like this. The monthly percentage of income spent on housing is higher for homeowners than renters. than renters. 35% of monthly income is going towards housing costs if you're a homeowner, nationwide aggregates, 30% for renters. And unlike the last time we saw this disparity, this is not because rent prices are so low. Rent prices are very high. And yet there is a significant delta, 35% versus 30% in terms of cost with homeowners versus renters. I think it's surreal. Okay. So right now we're sitting at 50-50 proposition for a Fed rate cut in September. It had been about 60% just a couple of weeks ago. Then we're at a 62% odds for a rate cut in November. And we're at 83% odds for a rate cut by the end of the year, effectively in December. Some of that 83% includes some of the odds that are baked in for being cut in November.

I am becoming much more skeptical that they will end up cutting in September. I just think, what's the point of doing your first quarter point, which isn't going to move the needle much in financial conditions? And it just exposes them to the headache of people kind of irrationally accusing them of trying to meddle in the election. There's very little precedent in a presidential election year of them doing something either way right before the election. And on a risk reward basis, even though I think it's kind of meaningless, what's the point of doing it when you can just wait till the November 7th meeting and take that accusation off the table. I think J-PAL

is reputation conscious, and I think that's very unlikely they'll end up cutting in September. And yet I do still believe that they're very likely to cut by the end of the year, but likely with some rate cuts in either November or December or both meetings, which take place after the election. I mentioned before oil was up over 3% today. Oil prices were down 3% last week. Natural gas prices were down 4%. OPEC Plus meets this coming Sunday. I do believe that they are expected to maintain their current production cuts,

and that will last through the end of the year, but we'll keep an eye on that. There's a chart in Dividend Cafe today about one of the biggest reasons to believe that natural gas prices in particular, it applies to other fossil fuels as well, that at least apart from prices, demand level, because of course it's a both supply and demand story with any fossil, with any fossil. But when you look at the expected ongoing explosion of growth in electricity use and the way in which we power electricity in our country, just data centers alone, is what the chart indicates. I think you have to understand that we are in need of the power to produce electricity. So I came across a piece called The Seven Laws of Pessimism that I'm going to use as the next seven editions of our own Against Doomsdayism, because I think it's such powerful stuff. And I think it helps explain some of the

pathology embedded in pessimism and also just kind of the logic as to what could cause people, despite a lot of the rational optimism that I think ought to exist in the way we assess certain conditions and societal realities. And I do think there's legitimate reasons to help understand where a pessimistic framework may come from. And the first law of pessimism, this is something that was written by a gentleman named Martin Boudry that I think is just very, very powerful, is what he calls the law of the invisibility of good news. That progress happens gradually and often imperceptibly, but regress happens all at once and immediately grabs our attention.

And I was thinking about this in the context of Roger Scruton, who was just a conservative mastermind, brilliant philosophical mind about the conservative posture. brilliant philosophical mind about the conservative posture. And he talked about the idea that conservatism is essentially the idea that good things are easily destroyed but not easily created. And that's a life lesson I believe in very much. But when it comes to the subject of pessimism, I think the principle at play is that we see a car accident, and the car accident can be literal or metaphorical right now, but we see the tragedy real time, visibly. We see it immediately. And again, whether it's a crime or a financial event or some natural disaster, what have

you, these things tend to be dramatic and all at once. And then the things that are most substantially positive in society are very often gradual. And they are not as sensationalistic as some event. And therefore, they can become less prominent in the way we assess conditions. That pessimism is largely a byproduct of just the way we receive bad news. And optimism is harder to come by because of the way we receive good news. So I think it's a very profound point. And I intend to continue unpacking some of these for the weeks to come.

The question in Ask TBG had to do with what we mean when we refer to outside money managers. Both Brian and I use that language a lot. And I just want to be clear that we at our firm are full, comprehensive, global asset allocators. We have an internal framework by which we allocate capital that we refer to as Operation Magnify. And it has seven building blocks in the client portfolio. And I've talked about this quite a bit over the last several years. But we are the ones that are taking full responsibility to allocate what

percentage we think is appropriate based on a client's risk reward, liquidity, income need, goals, timeline, and then also responsible to take that allocation and apply it inside an asset location. What is appropriate and most tax efficient in IRA accounts versus trust accounts versus Roth accounts, et cetera, et cetera. So we have to do the full asset allocation and then do it in the context of a location. But then within those individual ingredients, we are managing the portion that is US equity, what we call core dividend ourselves. And what I mean by that is we're actually trading it. We're doing the research. We're making the buy and sell decisions. So the whole soup to nuts of that portion of portfolio management is being made by us.

And other advisors out there might be using ETFs or mutual funds. Their firm is very often picking an allocation for them or picking stocks or whatever the case may be, where we're very active and we're actually the ones running the U.S. equity. Now, we may be deciding that Mr. Jones is going to have 10% of his money in boring tax-free bonds. And we may be deciding that Mrs. Smith is going to have 30% in boring taxable bonds. But when it comes to the actual selection of bonds and the composition of a full bond portfolio, we are not the ones selecting the bonds. We use an outside manager. In our particular case, for tax-free, we use a company called Invesco.

For taxable, we have a very long-term relationship with a company called Voya. And so that's an outside manager where there's more specialization. And so that's an outside manager where there's more specialization, that that's all they're doing. And they generally are running a significant amount of institutional money. And we insist on really having a close relationship with outside managers we work with and being very in tune with what they're doing, heavy communication, heavy monitoring and diligence. That's all part of our job. heavy monitoring and diligence. That's all part of our job. So we're rare in that we are actually actively managing the largest asset class, our dividend growth equity, that is a big part

of our portfolio strategy. We're actually managing that in-house. But when it comes to more specialized niche asset classes like emerging markets, small cap growth, we do utilize an asset, at classes like emerging markets, small cap growth, we do utilize an asset, an outside manager. So that recap is kind of available inside Dividend Cafe today if you're interested. But I thought it was a good question. I wanted to give that explanation. Okay, I've gone on a long time for a Monday Dividend Cafe, but again, it's Tuesday. So everything's kind of off. I'm going to leave it there for today, and then we'll be back to regularly scheduled programming tomorrow. And I'm looking forward to a special Dividend Cafe for you on Friday.

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