The Dividend Cafe - The Theory and Practice of Navigating these Booming Markets

Episode Date: February 17, 2017

The Theory and Practice of Navigating these Booming Markets by The Bahnsen Group

Hello, welcome to this week's Dividend Cafe podcast. We know what's on the mind of investors this week. How much longer can this market rally last? We address this quite head on along with all sorts of must read and must hear and must view information about the economy, global conditions, emerging markets, earnings, the whole kit and caboodle. emerging markets, earnings, the whole kit and caboodle. There are times when investors are least interested and engaged, and that is the times that things are going well. And then there are times that investors are very engaged when things are not going well. With all that said,

we think that it is most important that you be engaged at times like this, that we be paying attention to what's happening in the marketplace when things are going well and not allow complacency to get in the way of the proper investor behaviors and investment practices. door behaviors and investment practices. Trees don't grow to the sky, but markets seem to go higher than people think. People ask a lot how far this market rally can go, and we get it. The market's moved a lot since the election, about 11% or so on the Dow, 10% or so on the S&P. And a lot of people believe it shouldn't be going so high. But I thought that it would be helpful if I explained a bit as to what exactly is the explanation for this type of market movement. And it's simply put both from a secular tailwind and a cyclical one. The secular trend is simple. Corporate earnings are accelerating and that always pushes markets higher.

If earnings were not accelerating, we would not see markets going higher. But regardless of who is the president, when earnings are growing, market prices generally go higher. tell you the whole story because in a cyclical sense, we're experiencing post-election anticipations adding extra accelerant to this market rally. Those things include tax reform expectations, infrastructure spending, the repeal of Obamacare, deregulation, and more. These political issues add optimism to the market, which is already in high gear because of an improved earnings environment. This is what a reflation trade looks like. Why do we believe interest rates going higher and stock prices advancing in anticipation of pro-growth policies has the feeling of a broad reflationary environment. Commodity prices. Commodity

prices have advanced significantly since election day with steel up over 25 percent, oil up over 20 percent, aluminum up nearly 10 percent. This is what a reflationary environment feels like. a reflationary environment feels like. The more things change, the more they really change. Walmart is the third largest employer in the world, behind the U.S. government and then the Chinese government, employing about 2.3 million people worldwide. It seems fair to say that one of Walmart's biggest competitors,

really their biggest competitor, is the e-commerce giant Amazon.com. Their total payroll at Amazon, 100,000 people. Amazon has double the market cap of Walmart, one-twenty-third as many employees. Is this a sign of the new economic reality that significant societal functions can and will be performed with a fraction of the human headcount previously used? These types of things require an investor's attention. If only we could figure out what's going wrong. I found this statistic worth sharing this week. Europe is 7% of the world's population. It represents 25% of the world's population. It represents 25% of the world's GDP,

and yet it makes 50% of the world's welfare payments. One could argue that maybe that is unsustainable. In theory, there is no difference between theory and practice. In practice, there is. is no difference between theory and practice. In practice, there is. One of the issues that should give investors tremendous pause about the border adjustment tax being thrown around is the confidence that certain policymakers have that the dollar will increase in direct proportion to the higher cost of the imports, therefore negating its impact. We are always very cautious when people have a high level of confidence about something a currency should do. The fact of the matter is that the border adjustment tax is real world stuff with real world prices, buyers, sellers, consumers, and impacted parties. The academic theories about what is supposed to work out are, well, theories. When it comes to 2017 tax reform, markets will most embrace that

which the general public would also most embrace. Pro-growth simplicity. Dividend growth for your peace of mind and your pocketbook. Our monumental studies of the realities of behavioral finance has taught us that investors have a hierarchy of needs when it comes to their financial peace of mind. We know how important cash flow and income is to investors, and we know how important assets and balance sheet wealth are. and balance sheet wealth are. We also know that most investors want to believe their income needs can be met in the present and the future without having to forfeit the possibility of their asset values growing. Scratching this combination of itches is, you guessed it, dividend growing equities

who possess the upside appreciation of the underlying stocks, all the while providing a growing cash flow for the income aspiration of their owners. Trump plus the Fed equals emerging markets dream. If there was one thing most conventional Wall Street bulls and bears alike agreed on in recent months, it was that the combination of Trumpian protectionism and Federal Reserve monetary tightening would be disastrous for emerging markets. Emerging markets responded in kind in November and much of December, and the common resurfaced questions of why do we own emerging markets came back around. But alas, in January and February, emerging markets have outperformed even the high-performing

U.S. equity markets. And we would note that bond spreads are historically low now in emerging markets credit. Either the premises are wrong, that the Fed is about to tighten or that Trump will be hard on global trading partners, or the market had overpriced these things to the extreme. We voted for the latter and continue to do so. We have not spent nearly enough time over the years talking about the Canadian oil industry and the role that their need to transport oil and gas plays in the story of MLPs, our oil and gas pipelines. Their production industry took a huge hit during the price collapse of oil two years ago. But with production ramping back up, we are reading more and more of an undiscussed story that has a profound environmental and economic impact.

The inadequate pipeline supply to transport Canada's vast oil and gas production. pipeline supply to transport Canada's vast oil and gas production. More pipelines will have to be built as the ecological risk and economic inefficiency of using rail to transport oil and gas is a big problem. More projects means more volumes. Canadian crude exports are the highest they've been in over a year and growing. Pipeline companies are improving their technology and systems to allow for greater volumes, but new projects are needed and that is good for the entire space. We're going to leave it there for the week. There's a wonderful chart at DividendCafe.com this week about the extremely low correlations existing right now across different sectors of the stock market and across individual names. My mentor and friend, Lowell Miller, is our quote of the week that some things change with elections.

Successful dividend investing does not. Please enjoy your weekend. We look forward to coming back to you again next week. Thank you for listening to the Dividend Cafe podcast.