The Dividend Cafe

Today's Post - https://bahnsen.co/40EOqh5

First of all, congratulations to the Huskies of the great state of Connecticut (where some of TBG’s favorite clients reside) on their NCAA championship. I assure you it was the news story today that deserved the most press coverage.

It was a pretty boring day in the market, and all the news wanted to talk about was the Trump court appearance and such. Bonds rallied quite a bit. Stocks had their first down day in a week.

The Q&A’s below dig into a key issue of understanding the stress in the banking system right now and a key issue about the Fed. Scroll down if interested.

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Today's Post - https://bahnsen.co/3ZFg4ZY

So congratulations to the San Diego State Aztecs and the UConn Huskies, who will go head to head tonight for the NCAA college basketball championship. It has been a tournament to remember – thrilling upsets and last-second shots – and enough investment lessons to generate a whole Dividend Cafe! The written is here, the video is here, and the podcast here. Yes, a March Madness Dividend Cafe, indeed.

I got coaxed into talking about the Trump indictment on Varney Friday, along with some refreshing reminders about investing in the energy sector.

You will find a little market review and a little of everything else in this very special Monday edition DC Today, with a whole whole whole lot of ENERGY and OIL in the aftermath of this weekend’s shocking news.

Off we go …

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Today's Post - https://bahnsen.co/40OgHkJ

Any time I use some sort of sports analogy in the Dividend Cafe I get a lot of emails from people who connect to it and say they love it, and then I get emails saying, “come on, I don’t care about sports – please just stick to the market!” I am never offended or bothered – Abraham Lincoln had a line about pleasing people once – but I am also not swayed. If I think there is a real investment or economic lesson that can be told with a sports analogy, I am going to mix that chocolate and peanut butter. And I promise you, today’s broad takeaway for investors is worth it even for your tortured souls who hate sports.

So jump on in to the Dividend Cafe …

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Today's Post - https://bahnsen.co/3G3Vdsa

So the market went up again today, went negative in the middle of the day, then rallied back in the second half of the day (see chart below). The FDIC is looking to move the cost of the recent bank failures to the banks that didn’t fail (read: to their customers), Sen. Joe Manchin has decided he regrets his support of the “Inflation Reduction Act” atrocity, I wrote of extraordinary bond market volatility two days ago, and then we went two days in a row with bonds frozen in time, and Dr. Anthony Fauci has himself a speaking gig (not sure if it will be virtual or not?).

I remain convinced that the key issue adding to profitability in the energy sector going forward is constrained supply, much of which is a decision and some of which is circumstantially forced. Sen. Manchin’s op-ed mentioned above may reflect a sitting U.S. Senator shocked – shocked! – to discover that many do not want to facilitate U.S. energy independence, but it is not a shock at all. And what it does is make the sector even more attractive as it pertains to legacy and incumbent assets, pipelines, and producers. The sector is capital constrained, which boosts expected rates of return for the capital that comes in. It is supply constrained, which boosts prices and margins for the supply that comes online. And it is sentiment constrained, which boosts risk premium around as a contrarian reality. It will ebb and flow, no doubt, but what the opponents of our U.S. energy sector never understand is that all the bad things are actually good things for investors.

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Today's Post - https://bahnsen.co/3JRB2yV

I read an interesting line from an analyst I read daily in my morning research this morning … “if the bulls are to reclaim control of this market, beta likely needs to reassert itself; hasn’t happened yet.” Of course, this sort of begs the question – bulls of what? Well, if one means “the market index,” then they have essentially said, “if those bullish for beta are to get what they want, beta needs to do well.” I think we call that a tautology. “If I am to eat ice cream I like, I will first have to eat ice cream that I like” is not a super profound observation. But I am not picking on this analyst or the comment – I am pointing out the premise hidden in the statement – that a “bull” means the “index” (beta just measures the portion of a return that is really index/market oriented). It highlighted for me how differently we think at TBG – that one can be agnostic about a broad market index (which is neither bullish nor bearish) yet still bullish on an investment strategy that is not remotely connected to beta … Indeed, to that end we work.

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

There are two things I think I have amply covered over the last few weeks: (1) Equity market volatility; and (2) the Bond market rally. Both things are true – equities have been all over the map, up and down, even as they are mostly flat (or actually slightly up) since all this banking commotion began. And bonds are indeed up a great deal, with the 1-year yield down a stunning 75 basis points since this began just three weeks ago and the longer end of the curve itself down 50 basis points.

But what is not covered in there is bond market volatility. The swings we have seen in bond yields in the last month are not like anything we have seen since Lehman in 2008. The “VIX” for bonds has elevated beyond what it did during COVID and beyond what it did during the taper tantrum of 2013. This is despite all the quantitative easing that has been done and the general “flight to safety” government bonds represent.

Now, much like equities (if not more so), one could argue these “day to day” swings in bond yields (and therefore in bond prices) really do not matter, and that would be true if all we were talking about was the investment return of one holding these underlying government bonds. But I bring it up because I think it speaks to something more than an expected return in a given asset class, but rather a deeper uncertainty, unpredictability, and general directionlessness that is perhaps permeating more than people understand. The policy milieu is not coherent right now, and rip-roaring bond market volatility says so.

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

There is a lot today on Housing, which is a matter of practical significance to a lot of you, and there is a lot today on the banking mess and the Fed, which is also connected to Housing. So I think you’ll find today’s missive practical and interesting.

After reports throughout the weekend that both First Citizens Bank and Valley National Bank were bidding with the FDIC to take over Silicon Valley Bank (both publicly traded, sub-$10bn market cap banks, the former out of North Carolina and the latter from New Jersey), the Monday morning announcement ended up being that First Citizens Bank would be the buyer. I don’t think the ownership of Silicon Valley Bank’s deposits, loans, brand, and locations is that important to markets overall, with the FDIC having already put unlimited depositor protection in place. The final resolution of their capital markets and securities business is more relevant to us at The Bahnsen Group, for a variety of portfolio-related reasons.

And really the final resolution of what will happen with First Republic Bank is the most pressing issue across markets out of the wide array of contenders.

Did you know the market closed at 32,254 the day of the Silicon Valley reports on Thursday, March 9, and closed at 32,238 on Friday, March 24, just two weeks later? In between there were ten days of extreme volatility and one day of light volatility, but from the start point to end point, it was dead. flat. in. the. market. And after today markets are UP since this soap opera began. Go figure.

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Today's Post - https://bahnsen.co/3JF6mRh

We are in a moment of “volatile Sundays” in the financial services industry. This is when market actors, policymakers, movers, and shakers have big news to announce on a Sunday in an effort to “beat markets opening”, or as Ben Bernanke once joked that his memoir would be called, “before Asia opens.”

I lived through it in spades in 2008 – Fannie and Freddie’s conservatorship, Lehman’s bankruptcy, Wachovia into the arms of Wells Fargo, Morgan Stanley’s deal with Mitsubishi, and the government’s extended backstop of Citi – all on different Sunday afternoon/evenings in either September, October, or November of 2008. I can tell you where I was, what I was doing, the exact date, the exact time, and all the things. Good times.

The last couple of Sundays have been a little adventurous, but for different reasons and with different catalysts. In a different environment, the news that UBS had done a “rescue acquisition” of Credit Suisse would have been the biggest news story of the entire year. I want to unpack it this week and share some thoughts on where it may be relevant for you, regular U.S. investors presumably with no direct exposure to either UBS or Credit Suisse, who normally just prefer to use your Sundays for church, family, rest, and sports.

Let’s jump into the Dividend Cafe!

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

That the market gave up -500 points in fifteen minutes at the end of the day yesterday but then rebounded +500 points this morning is, to me, validation of my theory regarding yesterday: that it was a closing speculative trade. Fundamentally, the facts on the table (where they are known) are not really subject to much debate.

So an interesting thing happened on the way home from processing the Fed’s announcement yesterday … Math. The Fed is now projecting a +0.4% real GDP growth rate this year, yet a +3.2% growth rate is currently showing in the Atlanta Fed model for Q1 (others have it at +2% and others at +2.5%). Regardless of whether or not Q1 comes in at +2% or +3% (and this always refers to an annualized quarterly number), you can’t get from there to +0.4% on the year without … wait for it … a recession.

But the Fed is also showing a projection of no rate cuts this year. And Powell is talking about a credit crunch coming and the financial markets doing their tightening for them. And the first two years of the yield curve are entirely inverted. And the futures market expectation for the 3-month t-bill rate (currently 4.75%) is that in 18 months, it will be below 3.5%. So what should we make of this?

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

All that matters today is what the Fed did and said. And what they did was raise rates a quarter point. And what they said was that “financial conditions have tightened” (well, there you go). And he said that these tighter financial conditions and tougher lending criteria from banks will “factor into their policy decisions” (phew).

As for a First Republic deal – the bank whose depositors basically now have a backstop from the FDIC but has now seen enough deposit withdrawals to warrant a deal with a bigger back to shore up its capital strength – the issue appears now to be what government backstop or assistance will be a part of any deal (something I predicted last week … any buyer in a position of strength knows the issue is systemic risk, and therefore has the leverage to ask for some sweeteners to come with the deal). Some of the items being discussed (per reports) are liability protection and/or relief on capital requirements and/or other regulatory relaxations. Keep your popcorn handy.

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