The Dividend Cafe

Today's Post - https://bahnsen.co/454dv7h A tad to my surprise CPI came in even lower than expected (+3.2% vs. consensus estimates of +3.3%). The core rate was +4.7% as anticipated. On the month, prices ex-food, ex-energy and ex-the B.S. shelter figure were down -0.1%. Within that +3.2% the shelter component was up +7.8%, as the model shows OER (owner’s equivalent rent) up +7.7% on the year and Rentals of primary residence up +8%. Uh huh. Core goods prices are up +0.8% on the year. +0.8%. The annualized total CPI from the last three months even with the bad shelter data is +1.9%. Shelter is overstating headline inflation by 30% and core inflation by 40% (and I actually think it is mor than that). Month-to-month data is moved by base effects of the year prior and energy prices. As for energy prices, it looks like much of the oil and gas surge was late July and not as captured in this month’s data as I would have expected. Two years ago this exact week the S&P was at 4,450 or so. Fast forward to today, the S&P is at 4,450 or so. But the 10-year yield was 1.32% and is now 4.02%. Would anyone guess that a near tripling of the bond yield would leave the market flat? Now, the Nasdaq is down -8.3% over the last two years, but still, you get the idea. Sometimes facts make no sense unless you have the gift of hindsight. Be careful about applying an investment conclusion to your forward-looking premises. As I always say, it will be hard enough for your premises to come true. It will be even harder for the conclusions that come from your premises to prove accurate. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Today's Post - https://bahnsen.co/3YukmEv I think the biggest news of the day was China’s -0.3% consumer price index for the month of July, and it’s -4.4% producer price index. This was the tenth month in a row of wholesale price deflation, but it was the first month in over two years of consumer price deflation. I am dedicating next week’s Dividend Cafe to the subject of Chinafication. In keeping with the message of the last two Dividend Cafes, our “credit watch” has a couple interesting things to note. Earnings were covering interest expense on investment grade loans 9.2x over right before the Fed began hiking rates. They are now covering them 8.2x. This is called the Interest Coverage Ratio and a high one is good (more coverage of the interest expense by the earnings of the company). Now, that number will get all the way down to 6x in recessions (2020, 2008, 2002), so this move down is not dramatic, but it is a deterioration that is worth watching. With High Yield it has moved from about 5x to just over 4x. Across the levered loan world total leverage is up a tad (debt divided by earnings), and coverage of the interest expense by either earnings or free cash flow is down a bit. None of these metrics yet indicate anything broken, yet all of them are modestly worse off than they were 12-18 months ago. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Today's Post - https://bahnsen.co/3OoSkpj From what I had initially thought would be a relatively quiet day in markets given the economic calendar, we ended up with a good amount of news to chew through in choppy markets with stocks selling off, a bid in bonds and volatility continuing its week-long climb. China reported softer than expected trade activity in exports and imports, reflecting its continued anemic recovery post-pandemic and further softness in its attempt to shift more towards a consumption-based economy. Following Fitch's downgrade on US debt last week, Moody's joined the downgrade party lowering the credit rating on ten small and mid-sized US banks today, issuing a negative outlook on over a dozen larger banks. Higher rates, an inverted yield curve, and concern in commercial real estate, not to mention the stress earlier in the year with SVB/FRB, all seem well-known at this point, so this felt a bit behind the curve. Stocks traded lower on the news down over 450 points by mid morning before regaining through the rest of the day closing down only modestly. All fully unpacked in the podcast video link below. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Today's Post - https://bahnsen.co/3Yoorda Greetings from New York City (again). Lots of fun stuff today in my favorite DC Today of the week – the Monday edition (I love Mondays for so many reasons). Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Today's Post - https://bahnsen.co/3rVTWPV I hope that you found last week’s Dividend Cafe on Credit to be informative and interesting. It’s summertime, and some people are more focused on the beach and the sun than syndicated loans, but not me. The cool factor has never quite been something people associated with me, and if I have to enter the month of August with a double issue of Dividend Cafe on Credit markets, I am going to do it. But it isn’t just for the least cool of us like me – as I mentioned last week, Credit is a sine qua non in our economy. It is not an end for economic activity, but it is a vital part of the means. Oil and gasoline are not the points of driving, but good luck driving without them (okay, fine, or without electricity – the point is the same). The point of last week’s Dividend Cafe was that Credit is both a signifier or messenger about economic reality and, at the same time, a catalyst or influencer on economic activity. I wrote last week’s Dividend Cafe in sub-optimal conditions (I will leave it there) and knew as I was wrapping it up that there was more to say, so I committed to a second part. So consider today some “extra credit” (see what I did there) – and jump on into the Dividend Cafe! Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Today's Post - https://bahnsen.co/3QoFycQ Saudi put a further stake in the ground on extending production cuts, and oil jumped over +2.5% as a result (nearing $82 WTI). Again, they cite the silliness of SPR not making any moves to refill (something I spoke about on CNBC last night). Other than 2008 when the world was ending, 2022 and 2023 have seen the highest bond volatility since the 1980’s. This year has actually seen more days of > 10bp moves in two-year treasury yields than even last year did! The higher yield levels in the long end of the curve are the story of the week in financial markets, for sure, though. The 10-year is not back to the 4.35% high it saw last year but it is comfortably over 4% again. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Today's Post - https://bahnsen.co/3DGpZpC Fitch (the least known of the three major credit rating agencies) downgraded the U.S. from AAA to AA+, citing growing fiscal deterioration and overall debt burden. Now, you might be thinking, “oh no this sounds really bad,” and certainly anyone who doesn’t think the debt burden in the U.S. is really bad has, shall we say, not let the medication wear off … But on the other hand, not referring to the debt itself – just referring to Fitch saying all this, you also might be thinking, “ummmm, did you guys just return to the office yesterday?” All headlines and Johnny-come-latelies aside, treasury yields laughed off this announcement today. We should note, S&P moved the rating to AA+ twelve years ago. If one were looking to understand financial market responses to U.S. sovereign debt reality, they would be more focused on the ramifications for liquidity in the financial system (Fed actions with easing and tightening and levels of reserves in the banking system) than the ability to repay debt. The latter is simply not a concern. The former is a volatile, uncertain, and unstable tale that ebbs and flows and impacts all sorts of risk assets. The ADP jobs number once again blew out, this time at 324k private sector jobs created in July (versus 190k expected). We shall see what BLS says on Friday. More than 40% of companies in the Russell 2000 (small cap index) have NEGATIVE earnings. Small cap benefits from active management. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Today's Post - https://bahnsen.co/3q8RMfd August is off and running! The Dow was up +3.4% in July, nearly half of its total gain in 2023 coming in the month. Both the Nasdaq and S&P were up over +3% as well. Bonds sold off today as yields rallied, and with a weak manufacturing number today, the only reason I can see bond yields climbing today is some expectation (for right or for wrong) that the jobs data will be strong this week. Copper moving higher is not a sign of pending economic weakness, theoretically. Congrats to the U.S. women’s soccer team on their 0-0 tie with Portugal, which enabled them to advance in the World Cup. Yep. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Today's Post - https://bahnsen.co/3rQeA3P Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Today's Post - https://bahnsen.co/3QipwRU Everyone loves to talk about the stock market. When it is doing well, people assume everything is great (wrongly). When it is doing poorly, people assume everything is terrible (wrongly). Presidencies can rise or fall based on the Dow or the S&P 500. The stock market is at least familiar to most people, even if they don’t own stocks. It has cultural familiarity on top of investment democratization.The same is not always true of the bond market, which is interesting since the bond market is so much larger and more important than the stock market. Interest rates, liquidity, mortgages, the currency of a country, and the monies that fund wars, governments, tunnels, schools, and bridges are all a by-product of the bond market. However, the overall world of “borrowing” (debt to one party, credit to another) covers more than just bonds. The “credit” markets delve into the borrowings that exist to make possible homebuilding, homebuying, home re-financing, commercial real estate, small business loans, big business loans, and so much else. Securitizing the debt around car loans, credit card loans, and even aircraft and yacht loans is big business. Credit is not just a “boring” bond market – it is what makes the world turn into a highly robust and active economy. Capital is needed to fund capitalism, and that capital is, far more often than not, “credit” – not “equity” … Today in the Dividend Cafe, we look at the current state of credit markets and what they teach us about the current state of affairs. Few things are more clear throughout economic history than this: weakening credit markets reflect economic weakness, then create economic weakness. It is a vicious cycle as old as the wheel. And even the wheel probably had someone developing it on credit … Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com