The Dividend Cafe - Thursday - December 11, 2025

Episode Date: December 11, 2025

Market Overview and Insights on Private Credit – December 11, 2025 In this episode of Dividend Cafe, Brian Szytel provides an update on the financial markets from the Newport Beach office of The Bahnsen Group. The DOW closed up by 646 points, while the S&P had modest gains and NASDAQ saw a slight decline. Szytel discusses the rotation from growth to value sectors, the recent actions of the Federal Reserve, and their impacts on the market. He also covers upcoming deregulatory changes and tax cuts, a weakening labor market, and concerns about overstated employment numbers. Additionally, he answers a listener question about payment-in-kind (PIK) in private credit, explaining the risks and how such loans are typically managed. He concludes by emphasizing the past three years' market performance and the potential for slower growth ahead. 00:00 Introduction and Market Overview 00:14 Stock Market Performance 01:13 Bond Market Insights 01:35 Federal Reserve Actions and Economic Impact 03:15 Corporate Profits and Economic Outlook 04:10 Private Credit and Payment in Kind (PIK) 06:18 Conclusion and Final Thoughts 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. Welcome back to Dividend Cafe this Thursday, December the 11th, Brian Saitel, back with you here in our Newport Beach office at the Bonson Group. And on another sunny day, this is just beautiful weather out here in California. And mostly positive day overall in markets, the Dow actually closed up 646 points. So this is after a nice, update yesterday also. So we got some follow-through today, and I'll talk about that. S&P was only up about two-tenths of a percent, and NASDAQ was actually negative two-tenths of a percent. So it was

one of those days where you had a big rotation from the growth area, the technology-driven growth side of the S&P 500 NASDAQ, more into the value side as a lot of this sector participation has just broadened out recently. And actually, you've seen the delta between something like the Dow, which, again, is a price-weighted, more concentrated index of 30 names versus the S&P 500, which is cap-weighted, and far more technology-driven, call it 40% or close to it. You've seen that delta between the two this year really start to shrink the past month or so. We're now under 3%. So where we end the year, this is already middle or so of December, I suspect that catching up

continues, but the time will tell. But there you have it on the stock side of things. the bond side today was pretty flat. The tenure was up one basis point on the day. We closed at 4.16 on 10 year yields. And why has there been this sort of move, I guess, higher on the long end of the curve and move lower on the short end, along with some risk assets tending to perform well, more on the value side. Why is that? Two things. One, the Fed cut rates yesterday, we know that, but the more important part of that equation was that they were adding to their balance sheet by 40 billion dollars a month. When we looked at what would probably grease the wheels of the credit

markets, we thought something around 20 billion would even do it. And so they added more than what the market had expected. And ultimately, whether that's a good or bad thing, it's needed to make the credit markets function successfully. And so it also tends to corally assets doing well. The question isn't that. It's more about the valuation of where things are already priced. You've gotten two days in a row of follow through on returns, so I think that speaks to some of these things happening. Just keep in mind as we go into the end of the year, the holidays will be here in literally a blink of an eye. You have other things that are positive for the overall economy. You've got a fair amount of deregulation that is set to come into next year on the financial side of things.

This is some change in some of the bank requirements and such. And then you also have just tax cuts with the legislation that was passed this year that will start to come into the economy. economy in Q1 as tax returns get filed. Both of those things are stimulative. Even aside from that, you've had a weakening labor market, and we've seen that. There's also comments yesterday after the Federal Reserve meeting from Powell talking about a potential for overstating some of the non-farm payroll numbers and BLS numbers and just employment numbers overall. And so what we've seen is a kind of a dismal report anyways. And then if you think of them being overstated by I call it 60,000 jobs a month.

You almost get into negative territory. So there's concern on the labor side. That's why the Fed is cutting rates and adding liquidity, okay? But that said, just remember, corporate profits and fixed investment, think of CAPEX, are both positive. And we've really rarely ever had a recession or never when both of those things are positive. And that's what we have now. So I would view 2026 is highly unlikely to have an actual contraction in the economy. But my point is just things have already ran.

up here three years in a row. So you've had S&P at double digits now for three years in a row. So just keep it in mind with what you're expecting on forward returns. Obviously, I'm biased. And so I tend to focus more on income and growth of income as a viable way to capture the lion share of a return. But that aside, we've had three years in a row. So just look historically. We're due, in other words, for some sort of a slowdown on markets. That's not a prediction. That's just what we've seen before. So anything I suppose is possible. But either way, I would just heed forward expectations. There was a question in there today on payment and kind. So it's a term called PICA that gets spoken about quite a bit in the media. Private credit has been a topic that has

been more popular given its expansion. And this was a pretty thoughtful question from someone that had formerly been in an adjacent industry, at least on the legal side. And it was about equity if that's part of these loans or not. The reality is lenders in a very competitive and very large space now are offering loans to sell them, to get good borrowers, and inside of the covenants they're allowing for a pick or a payment-and-kind option or a toggle. So if the business, particularly high-growth businesses like software for services type of businesses, need to basically expand the debit amount of the loan rather than pay back the interest for a short period while the business scales and ramps up and they expand their capital expenditure and so on,

they're able to do that. The question really is just of an entire loan book from a private credit lender, how much of it is coming to them in the form of PICA pick, because there's a lot of risk to it. You're essentially paying debt back with more debt. So that's not a good thing. If it's a lower percentage and or if there is an equity component or it's specific to certain industries, then that's where it can still be investable. And that work to decide that is done by us, but it's also done by the managers that we use in that space with teams of analysts and lawyers to read through covenant documents and such in loans. The other thing that we tend to do is focus only on the largest deals and only on quality. And so we're giving up some current income, some current return

potential for that quality, but we just feel it's very warranted. And that's the way we're looking at it. But the short answer is, yes, there's some equity and warrants that are included sometimes in these deals. But even aside from that, just understand that when there's an actual workout in distress, meaning there's dislocation, the equity and the value of the company is what gets exchanged for the debt that is owed. So it is important, and that's something that is looked at quite a bit. So that's the way I'd answer that question. I hope that at least provided some context to some of you folks looking at private credit. That's what I have again, Thursday is today. So you'll head into your weekend, and I appreciate listening, as always.

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