The Dividend Cafe - The Realities of the Market Moves that Matter

Episode Date: March 20, 2020

There is a Friday Dividend Cafe coming – I do not know when – where the basic tone will be celebratory, and the underlying emotion will be relief. Some lift in equities, some normalization in credit, and some feeling that the worst is all behind us – that Dividend Cafe is coming. Will it be next week or months down the line? I do not know. But I look forward to writing it, and I imagine many of you look forward to reading it. This week is not that week, and I believe this week’s Dividend Cafe does as much to make sense of everything going on and where we are headed than anything I have written so far. I also do believe the national call we hosted on Tuesday remains current in explaining our outlook. In the meantime, the country as a whole, not just investors, remain in a period of uncertainty and challenge. And out of this uncertainty and challenge, I believe will come much better days. Let’s jump into the Dividend Cafe. Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. you know, most of the trading data go. And obviously these days, that means that as I'm recording, there's no possible way for me to forecast where we're going to end up. You can likely tell that I'm recording from my home study with California being, you know, kind of in the same sort of home lockdown type situation that much of the country's in. Every member of the Bonson Group is working remotely and has been doing so pretty much all week. Some of us have gone in and out of the Newport office, is working remotely and has been doing so pretty much all week. Some of us have gone in and out of the Newport office, but even that's kind of come to a standstill. So that's where we are. But I'm more here to talk about where we are in the market, where things

stand around this health pandemic, but also, of course, the most distressing few weeks in the market since the financial crisis. I did a call, a national conference call on Tuesday, and I laid out our sort of viewpoint and forecast and framework for how we're addressing all this in a couple phases on that call. And I'm going to reiterate some of that now because that framework is very much where things stand. The first is the present phase from an investor standpoint, particularly day-to-day viewing of the assets and so forth. I do stand behind my belief that ideally for a regular investor, they would not be looking day by day, but I understand that's not necessarily practical for everybody. But there are prices being reflected in things that are so dislocated from reality.

It's very misleading. And on stocks, if a stock has dropped significantly, which they all pretty much have, it's down. Like if you were to sell it, you're going to get a lower price. And that's related to all the factors that we kind of know about and have talked about and may or may not persist for some certain period of time. We're in a bear market in stocks right now. There is a either very minor or very not minor recession coming. All of that we know it's baked in and stocks would go lower. They could bounce from where we are. That part is awful, but that's not the part I'm referring to right now. I'm

referring to dislocation in financial markets where prices do not reflect reality because there's an avalanche of selling of money, good assets, primarily bonds as investors, particularly over levered ones need to raise cash. And the spread between a bid and ask is so wide. So what a seller is selling for and a buyer is paying are are widely disconnected and that price gets marked and it looks as if things are down 10 percent eight percent that are in fact in reality when prices normalize not down at all and so you you have this unbelievable dislocation in the value of more illiquid, riskier credits, syndicated loans, preferreds, other credit instruments. But then even treasury bonds and highly rated municipal bonds particularly have seen this kind of dislocation.

And so my point being on phase one, that there is this need to allow that delevering to work its way through the system, allow the rapidity of the selling volume cash raise to happen, and you get a more normalized market environment that will spill into stocks as well. But primarily right now, it's necessary for just a healthy functioning, better optics in financial markets. The downside to it in the short term is makes an incredibly bad time not just to be selling stocks because of their value right now, but it makes it an incredibly bad time to be selling bonds where a lot of people want to sell because interest rates are so low, and they and they want to add money to stocks or they need to

raise cash. And yet bonds have become a very bad place to sell for the short term, simply because of that mismarking, that dislocation in capital markets. So I think that at the other side of this phase of things, then we will get into the point of dealing with the fundamentals of what's happening in this coronavirus pandemic. And I've sort of chalked it up that there are mediating circumstances along the way that are going to be really important to comprehend. First is the monetary stimulus, which is mostly baked in, although there's a couple outliers that still linger out there that I think have the potential to be game changers, and I don't know if they're going to happen or not.

I elaborate on it more technically in DividendCafe.com, but I want you to understand the possibility of the Fed entering the market to become a buyer of municipal bonds probably would not have to invoke 13.3 allowances to do that, the Emergency Act provisions. Municipal bonds could be legally construed to fit the definition of government securities, which is what the federal charter allows. It would allow for, well, first of all, potentially quasi-monetization of municipal securities, which is what the federal charter allows. It would allow for, well, first of all, potentially quasi-monetization of municipal debt, but that would not be the objective. It would be simply to take onto their balance sheet these other money good assets, which by the way, at this point, would not only add a ton of liquidity, but it would

really add to the profits that the Federal Reserve balance sheet is likely to incur through this whole period of distress. But then in the meantime, it would really alleviate a lot of issues across capital markets for asset allocated investors. So the Fed, the central banks, central banks of the world, the ECB this week added about 800 billion stimulus into their repertoire. I think we know those things, and I've already kind of alluded to them. There's no point in saying what they're doing, because they're doing everything. It's repos, it's quantitative easing, it's mortgage-backed securities, it's swap lines with foreign central banks. It's obviously the zero interest rate policy. It's money market stoppage backdrop. I guess I said I wasn't going to list

it all, but I mean, that's what I'm getting to. Commercial paper facilitation. It's their whole toolbox, most of which was constructed out of the financial crisis in 2008. So the large objective of the central bank to produce orderly markets and add liquidity and do so using their balance sheet as the weapon, the ability to create money out of nothing, allegedly. So anyways, we'll deal with the downsides of all that later. Right now, we're in the moment. That's the monetary intervention into where things stand. The fiscal is the big one. The news could come over the weekend. I don't think it will. I think you'll hear more of the jockeying, horse trading, and discussions. But more or less,

one to one and a half trillion dollar stimulus bill, the GOP Senate's laid out their outline. I go through every bullet point of it in dividendcafe.com, money directly to taxpayers, tax relief, tax delays. But the largest weapon probably in there is federally backed loan guarantees where businesses can access the loan market, federally backed loan guarantees where businesses can access the loan market, the banks can pass it off to the government, and then there'll be conditions for accessing this sort of loan facility. It would be necessary to pull a lot of these businesses through this difficult time. In theory, these loans will get paid back, the banks will be made whole, the banks are backed by the government, and the government just functions as that distressed investor during this time. But again, there's conditions out there. I

can assure you they're not going to allow stock buybacks for companies that access this. President Trump this week said he would support that ban. But there's other things that the Democrats may want to do that Republicans may push back on. This is the hardest part for me right now to tell you is I would love to think that there's going to be this major announcement coming over the weekend, but I'm very skeptical there will be. But I still do think there'll be an announcement by next week. But along the way, we have to be ready for market volatility. If it looks like a deal's going to fall apart, then come back on, trade this, trade that. That's just the nature of the politicking here. But it sure seems to me,

unlike TARP back in September 2008, that there's an incredible desire for a deal to get done, not least of which because those senators want to get the hell out of Washington DC right now. Okay, so the third issue then is the health pandemic. And that is what I'll spend the least amount of time providing information on. Because I think everyone has access to the same information I do. There's a lot of very positive data out there. There's a lot of unknown data. There's negative. And people can assume different things about where we're going. I am really determined to not state a lot of what I think about all this until we move further along. I'm not in the health forecasting business. And frankly, some of the opinions and things right now is just premature. The point being is the market will respond very positively when the market

believes that curve is flattening. And the market may not be able to respond positively until that point. So the uncertainty persists, which is why you're at Dow levels where you are. And that is unfortunately here to stay. I really want people to read DividendCafe.com for where we stand on the oil aspect of all this. It's a whole nother element implemented in the capital markets right now, whereby either a Russia-Saudi deal is coming, where US intervention is coming primarily through a tariff on imported oil, or of course, just big players, including private equity coming in to avoid a default surge, or you end up having a default surge and a lot of weak banks and weak energy

players go down. Markets pricing in that last one, I think it's the least likely to happen, but it certainly could. There's nothing that can be done for energy investors other than wait through this because one of those solutions is going to come about. When something can't continue, it won't, Herb Stein. And that's where we stand right now. So there's a lot of information there. Finally, as I get ready to wrap this up, the history of bear markets and how those things have played out over time, one year, three year, five year, please see the historical date on it that I can't put here on the podcast now at dividendcafe.com. One of the most interesting charts I think I've put into a long time. I beg you for your questions. Email us directly. Reach out. We're here to talk,

help you through the situation. If you're a client of ours, be in touch with your private wealth advisor. If you're not a client of ours and you have questions, we're certainly happy to answer as well. But these are difficult times and we're not out of the woods yet. This has been a horrific week following a horrific week last week. And the two weeks before that weren't exactly a walk in the park either. So we know the violence of the moment we're in. And I also know that better times are coming. And I hope you know that too.

Thank you for listening to this week's Dividend Cafe. Thank you. 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 opinion, news, research, analyses, prices, or other information contained in this research is provided as general market commentary. It does not constitute investment advice. The team at Hightower should not be in any way liable for claims and make no express or implied representations or warranties as to the accuracy or completeness of the data and other information or for statements or errors contained in or omissions from the obtained data 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 team and do not represent those of Hightower Advisors LLC or any of its affiliates.