The Dividend Cafe

Today's Link - https://bahnsen.co/3IxtjXf

Since the new calendar year began just about six weeks ago oil prices are basically flat, having started right around $80/barrel and still sitting now right around the same level.  The energy sector indices are all up on the year, somewhere around +1%, so nowhere near the level, the market is up year-to-date, but up nicely nonetheless.  It's not been a rally mode, but it's not been a sell-off, either.

Yet there is a lot going on under the surface.  One can be forgiven for being suspicious of the idea that both the commodity side and public equity side can stay flattish and benignly boring for long.

My goal in this week's Dividend Cafe is to update our macro perspective on the energy sector and offer some correct practical suggestions around investing in it.  It's a little economic, a little political, a little global, and a lot of fun.  But you knew that already ...  So let's jump into the Dividend Cafe!

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ASK DAVID

~ L.K.

I disagree with Larry Lindsey emphatically on this. It’s inherently contradictory – if the Fed were to try to let financial conditions drive monetary policy, then financial conditions would price (or try to price) how and what the Fed would be reacting to, giving the Fed a constantly moving target. The Fed influences yields and multiples and spreads; to then be influenced by yields, multiples, and spreads is perpetually circular and incoherent.

Links mentioned in this episode:

Today's Link - https://bahnsen.co/3xqUhJS

ASK DAVID

“If valuation matters at the time of purchase, why would it not matter at the time of reinvestment of dividends from that same company purchased?”

~ Steve

The simple answer is – it does, and if we felt a company’s valuation was so excessive that we didn’t want dividends reinvested in that company, why would we want to own the company at all? So the question about reinvestment always answers itself. If a dividend shouldn’t be reinvested in the company issuing it, it shouldn’t be owned at all.

Now, why would we potentially reject a stock at $225/share, buy it at $150/share, and then still keep it when it is back above $200/share? Is it a matter of just liking it differently now versus when it was first at $225? Less subjectively than that, the entry yield was likely different, the free cash flow projections were likely different, the buffer of safety was different, management forecasts of dividend growth were likely different, and where the company or economic cycle stood was likely different. So criteria always include different inputs and points of emphasis and focus at different times and therefore at different prices.

A company can be at 20x earnings and $100/share, and then 10x earnings and $200/share. Valuation, not price, always and forever. But along with valuation are Free Cash Flow, growth rates, dividend yield, capex expectations, and much more.

Links mentioned in this episode:

Today's Link: https://bahnsen.co/3E7qE3V

The CPI number for the month of January came in at +0.4% for core inflation and +0.5% for headline inflation, exactly in line with expectations. The year-over-year number is down to 6.4%, vs. the high of 9.1% last summer, and less than last month’s 6.5%. This represents seven months in a row of a declining inflation rate.

Core goods have now deflated by 4.8% on an annualized basis over the last four months. The deflationary drag of core goods will wear off in the months ahead as the year-over-year comparison wanes (lower comparative number, otherwise known as base effect).

Shipping Costs from China are down -90% from a year ago and it seems some people just want to act like that is a small factor in all of this (or prices being 10x higher than they are now was a small factor in the previous goods inflation). I remain mystified by this willful blindness.

“Owner’s Equivalent Rent” was up +0.7% on the month and 7.8% on the year. Uh-huh. The disinflationary impact from shelter is expected to become visible in the data from March through the end of the year (last March people were still signing leases higher than those the month before, but by spring the rents peaked and then downward pressure began in earnest in the second half of the year, so that gets picked up in year-over-year numbers this year). I believe the impact of this will be worth three full percentage points to headline CPI by the end of the year (meaning, shaving three points off). Some other analyst estimates have it between 2.5% and 2.8% of a downward impact.

The new category of “super-core” inflation – that is, inflation on that which is left when you exclude food, energy, and housing, is sticking around 4% right now.

Links mentioned in this episode:

Today's Link: https://bahnsen.co/3HXUEAl

A rally day in the markets, telling you exactly what the markets think about the theory of extra-terrestrial attacks from UFOs… More below!

Dividend Cafe took a stab Friday at applying our present economic outlook (short-term and long-term) to the logic of dividend growth investing.

Off we go …

Market Action

Futures opened down -70 points last night just as the Super Bowl was kicking off so I figure anyone trading futures at that time was a weirdo. By bedtime, they were down over a hundred points, and at wake-up, they were basically flat.

With almost 70% of the earnings season now complete we are tracking 5% year-over-year sales growth and a year-over-year earnings decline of -2.8%. Full-year earnings estimates continue to sit at $224/share from the S&P 500.

Links mentioned in this episode:

Link to Dividend Cafe: https://bahnsen.co/3jErUVn

I wrote last week about the multi-year (and indeed, multi-decade) beliefs we have about macroeconomic conditions. In a nutshell, I made the case that we face a form of “Japanification” where the diminishing return of fiscal and monetary efforts to goose our economy from the impact high debt has had on its growth leads to yet more debt and also less growth, all as part of a feedback loop.

I wrote the week before about the uncertainty of what will happen in the economy this year and presented the most objective cases I could both for and against a 2023 recession. The market seems to be voting against a severe recession this year so far. This causes me to believe a recession is more likely. Many of the most famous “perma-bears” of our land have heavily leaned into the assurance of a severe recession. This causes me to believe one is less likely. (I really do crack myself up).

A fair question out of the “longer-term” outlook we have (Japanification) and the “shorter-term” outlook we have (recession possibility without recession certainty) is why we see Dividend Growth as an extremely compelling solution in these scenarios. Dividend Growth Equity investing is “risk investing” (there is no maturity date where a par value is promised by the federal government). There are plenty of forms of risk investing, and I want to explain why I believe dividend growth is uniquely suited for these moments.

So jump on into the Dividend Cafe …

Links mentioned in this episode:

The DC Today - Thursday, Feb 9 - https://bahnsen.co/40IKvQA

Ask Trevor

I can sympathize with the premise here – if earnings face some headwinds, and rising rates compress multiples, you want to know what drives stock prices higher from here. The real answer is I don’t know and this is the right answer because it is unknowable. Now, we could craft a reasonable narrative of what could happen, and how things might play out, but we’d never speculate on a hypothesis like this.

For me, I like to approach portfolio construction by categorizing each dollar into one of two categories – money earmarked to be spent in the near future and money set aside to grow over the long run. With this framing in mind, a conversation about swapping stocks for treasuries is an apples-and-oranges discussion. Stocks will irritate you in the short run, and yet history has shown a reward for the patient long-term investor, we call this a risk premium.

Portfolio design made simple is all about matching the appropriate investment based on a well-defined time horizon. If you ever find yourself trying to invest long-term monies in short-term solutions or vice versa, you are participating in some version of market timing.

Based on my own experience, I know I can’t time the markets in a consistent or profitable manner. I also know I have never really met anyone who can. So, if it walks like market timing, talks like market timing, it’s probably market timing, and you can’t count me out.

Links mentioned in this episode:

Good afternoon, Brian Szytel here with you today on this down day in markets following yesterday’s unconvincing (to me, at least) Fed-led rally. Today there is more chatter from several other Fed Presidents I’ll discuss, along with some comments on inflation, recession indications, and some takeaway comments from last night’s State of the Union address. Plenty to go through, including my Super Bowl prediction at the end, so I’ll let you hop into the podcast link below from here and reach out with any questions, as always.

US futures opened last night down slightly, losing a little ground through the night, pointing to a down 100-point open at home, while Europe, in contrast, continued to hold gains.

Dow: -207 points (-.61%)

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Lots of chatter from Fed Governors these days with Kashkari saying we need higher rates for longer, Bostic in Atlanta saying January’s jobs report speaks to another rate hike (which was already priced in), but now today Jerome Powell basically reaffirming his message of last week, which is one of an imminent pause. Right now, we see a 91% chance of a quarter-point hike at the next meeting and a 70% chance of one more quarter-point hike after that.

Dow: +266 points (+0.78%)

Bond yields have jumped 37 basis points since the 1st of the month on the short end of the curve

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Futures opened last night down -80 points and stayed down near -100 points into the evening. This morning futures pointed to a down -200 point open pre-market.

We are exactly halfway through earnings season (that number will explode higher this week) and revenue growth appears to be tracking towards +4.6% year-over-year (a tad better than expected) with earnings decline tracking towards -2.7% year-over-year (a bit worse than expected). Full-year earnings now sit at $224 expected, a +2.2% increase over the $219 of last year. Profit margins declining from 17.7% at their peak early last year to 16.2% is the big reason for the delta between revenues and earnings. Expect all this to update a lot in the next two quarters.

The ten-year bond yield closed today at 3.65%, up 12 basis points today

Links mentioned in this episode: