The Dividend Cafe

Today's Post - https://bahnsen.co/3TrUXux

I did a Dividend Cafe exactly six months ago about housing, focusing then on the duel economic and cultural reality of what was going on in the housing market. I think another six months gone by is a pretty good amount of time to now re-address this vital subject in American life. Housing is, for some, a crucial part of their economic story. Even for those smart enough not to think of their house as a “retirement asset” it is still a crucial economic consideration. Almost everyone I have ever met needs a place to live, and the ones I met who did not had very odd theories on the JFK assassination. Very few people own an asset with as much leverage attached to it as their home (assuming one puts 20% down they are 4-to-1 levered on the purchase; imagine buying $1 million of stock and only paying $200,000 for it). Housing costs (monthly) from rent or mortgage to property taxes and maintenance and insurance are the highest percentage of the monthly outflow of nearly every single family in America (even many who do not have a mortgage).

Beyond the economic reality of housing, from the silly (it is an “investment”) to the practical (it cost money to live somewhere), there is a deeply personal reality to housing, including for yours truly. People make memories in houses, they associate periods of their life with where they live, and they form families and social connectivity around houses. And even with all the suburban model has done in a postmodern culture to undermine community, many people’s “houses” are also part of their “neighborhoods” – a Tocquevillian concept we’d be wise to re-affirm. This subject matters.

So today in the Dividend Cafe I want to “check in” on the subject.

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Today's Post - https://bahnsen.co/4aigyM6

Well, and there you have it – coming out of a global pandemic where the world shut down and reopened and supply chain disruption and pent-up demand caused 9% inflation, the Fed raised rates 525bps in one year, inflation fell back down without rising unemployment, the economy still grew, and as of yesterday, the Dow closed at an all-time high. I really don’t think, in all humility, there was anyone out there (including yours truly) that would have predicted all that. Now, there is still more time to go before I think you can officially fly the soft landing flags, but we are getting close after yesterday’s Fed meeting and statements.

Adding to that narrative, we had some encouraging retail sales and jobless claims data today that had markets higher again. Also, the good ole three handle 10yr is back! We closed below 4% today down another 11 bps at 3.91% on 10’s for the day. Does all this sound too good to be true? I assure you there are still plenty of things in the world to worry about, but my sense at this point, with a dearth of large economic data coming out before the year-end, is that we will head into the holidays feeling a little more merrier than we did last year. =)

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Today's Post -https://bahnsen.co/46RNNmw

This may have been the least anticipated Fed Day in nearly two years, with the futures market serving up a 100% chance of no rate change ever since the last Fed meeting. That said, the Fed chair talking after a rate announcement always has the possibility of moving markets. Today, he moved markets. That he didn’t even remotely push back against market expectations for rate cuts next year was a surprise, but the dot plot actually showing three rate cuts in 2024 was a huge surprise. Now, I have been saying it for months, and fed futures have been forecasting it, so maybe this market response seems overdone – but for Jay Powell to just say it? Today was like reading a future history book.

I think it is important to note that the Fed Funds Futures are currently pricing in a 100% chance of a 100 basis point reduction (1%) in the Fed Funds Rate by this time next year. There is a 24% chance of it being down 1.25%, a 37% chance of it being down 1.50%, and a 26% chance of it being down 1.75% – all by next year. The most “hawkish” expectation is a 100 basis point cut.

All stock market indexes were up the SAME. And I am pretty much sure this was the biggest bond rally of my career in a single day, as the 2-year yield dropped THIRTY BASIS POINTS and the 10-year dropped EIGHTEEN BASIS POINTS. Ay yi yi.

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Today's Post - https://bahnsen.co/3Nr4A93

A consistently positive trading day on this inflation-day-Tuesday. Both core and headline CPI came out largely in line with expectations and markets were constructive with stocks modestly higher and built on gains into the close and rates down just a few basis points. These numbers are coming out right in time for the December FOMC meeting to end tomorrow with a rate decision (which is at a 100% chance for a continued pause), Fed statement update and Powell presser following.

Continued broadening out in markets with more non mega cap technology names participating. Yesterday by the way, was the first time in over 10 years we had markets up broadly (including a positive Nasdaq) with all seven of the largest technology names (aka Magnificent Seven) all closing lower. Today we had more participation those names, but worth noting the subtle shift in leadership, particularly with Industrials.

A positive dynamic we have spoken about for years but particularly post the Russia/Ukraine conflict continues to play out in energy markets. For the month of November, 68% of all US LNG exports were sent to Europe which has now over taken Asia as the number one destination for US LNG exports. Just as tensions between US/China has begun to permanently shift supply chain manufacturing destinations globally, the EU shifting its reliance on Russia for its energy and heating needs isn’t likely to be temporary and is quite positive for the US energy dynamic.

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Today's Post - https://bahnsen.co/41lZfWf

Greetings from 29 degree Grand Rapids, Michigan where I have had a day of meetings and recordings and give two different speeches in two different Michigan cities tomorrow. I will be back in the much warmer climate of New York City on Wednesday. In the meantime, the special Monday DC Today awaits you …

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Today's Post - https://bahnsen.co/3t62eFN

I really do like the SOP for Dividend Cafe (that’s “standard operating procedure” for those of you who have time to say full words instead of acronyms that always require explanation anyways, hence adding triple the time to what could have just been said in long form to begin with). What I mean here is that I have for several years now selected a singular topic for each week’s Dividend Cafe and written a 2,000-3,000 word piece on that topic. There have been a few exceptions where we did a wide array of “Q&A” as our focus, and we will continue doing that once a quarter or so when we get an excessive build-up of “Ask Davids” that the DC Today cannot bear. But for the most part, the Dividend Cafe is, I think, better as a deeper dive week by week into a given topic on my mind and heart. I keep it investment and economy focused, of course, because if I went anywhere my mind and heart went, I would end up doing some Dividend Cafes about my favorite steakhouses in New York City, what is wrong with today’s Republican Party, or what in the world my daughter’s vernacular in our family group text chat means. But Dividend Cafe will stay in its lane, I promise. Focus, David, focus.

Anyways, today I am doing the buffet thing, but I didn’t write it throughout the week – I wrote it all at once. I simply had three “mini” topics I wanted to address instead of one “mega” topic. I hope it is cohesive and interesting, but if you hate it, at least you know next week, we will go back to the single-topic norm of the Dividend Cafe – our SOP.

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Today's Post - https://bahnsen.co/4abzegh

The market opened up a handful of points this morning and slowly built on gains for most of the day. After a big move lower across the curve in yields this week we took a bit of a breather today with a flat 10YR up two basis points at 4.14%. Stay tuned for a three handle on 10’s.

We are starting to see this market rally broaden out with the equal weight version of the SP500 breaking away from the market cap weighted index. This is showing the average stock starting to participate more in this rally outside of technology names, which I find constructive. Both large cap and regional banks by the way are back to where they were pre SVB failure earlier in the year. Part as a normalization of stress in the financials and part for a 2024 line up that could favor the banks if we get better net interest margins as the yield curve potentially normalizes with the short end moving down. This is something we have seen before; late cycle rally in financials as the Fed pauses and ultimately cuts the following year (95’/96′ comes to mind).

Monthly financial obligations for consumers like auto payments and home payments, as a percentage of household cash, are on the rise and now at 16%. Interesting however that even with such a rise in rates these are still actually below pre-pandemic levels which was closer to 18%. Higher rates just haven’t bit as hard as years past with such a prolonged low rate refinancing period the years preceding it.

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Today's Post - https://bahnsen.co/486oKwS

If you’re surprised by how much expectations have turned down for U.S. interest rates and Fed policy in 2024, you should see what those crazy cats in Europe have going. Markets are now fully pricing in SIX rate cuts next year – 1.5% reduction in their lending rate.

Bank CEOs testified before the Senate finance committee today, making the case that the planned increase in capital requirements would be detrimental. They specifically pointed to where the cost of such increased capital would come from – customers. A not-unexpected talk.

Former House Speaker Kevin McCarthy (Bakersfield, CA) announced his resignation from Congress today. I hereby predict he will make more money in 2024 than he did in 2023.

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Today's Post - https://bahnsen.co/4a8TMWG

As we get ready for a busy week of jobs data a few things stick out:

(1) The weekly jobless claims remain very low which seems to indicate a continued healthy employment market

(2) The “quits” rate (people voluntarily leaving their job) has been very high, and even as it has come down from early 2022 highs, it remains very elevated historically

(3) The number of job openings remains very high (though it fell to 8.7 million this month, still 1.5-2 million higher than pre-COVID average, but well off 2021 highs)

(4) The average work week has steadily declined on the margin (from 35 hours, which was above the 15-year average, to 34.25 hours, which is below the average).

(5) Several data points have softened in recent months, but not softened to what can be called “weak” conditions – just “less strong” than had been the case previously

A few other market tidbits and things that caught my eye today …

It is interesting to me that small cap value has outperformed growth since the turn in the middle of the year, but large cap growth has modestly outperformed large cap value. The two are normally correlated.

Some of the “big seven” names that have driven a lot of the market this year have not moved at all in six months (well, they have moved up and down, but I mean they currently sit flat from where they were this summer). The broader market has begun playing a little catch-up.

2024 earnings expectations are now up to $246/share in the S&P 500. We are likely going to end at $221 for 2023 so this would mean earnings growth of +11.3% in 2024, rather amazing if it happened. Of course, at that earnings level, the S&P is still trading at an 18.6x multiple (forward projected), and is trading currently at 20.7x.

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Today's Post - https://bahnsen.co/3uFMLMZ

Ask David

“If you are an investor in a passive index fund, exactly what happens to your equity when that fund/index removes a poor performer, and replaces it with a stock that has recently performed much better? While I suspect that your equity may stay the same upon replacement, it seems intuitively like an example of buying high while selling low. Is there any documented study of index fund performance over time due to the survival bias? Do you have any thoughts on the topic?”

I think I understand what you are saying but actually in this case the survival bias of the index methodology helps its performance over time, not hurts. What you are suggesting makes sense prima facie – that they are adding companies at high prices and removing others at low prices – but the fact of the matter is that the companies removed from the index is very rare, and almost always only happens after the company is broken. A significant amount of companies that have been removed from market indices over the years no longer exist at all, meaning that path from “a low price” to “zero” was never experienced by the index investor. Of course, there are cases when a company is removed from an index and subsequently rallies from a low valuation, but that is much less frequent than the opposite. And all of it is very rare and inconsequential …

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