The Dividend Cafe

Today's Post - https://bahnsen.co/44MFjx8 So the CPI today came in today at 4.9% year-over-year, the lowest we have seen now since April of 2021. 5% had been expected so it is another month of slightly lower than expected year-over-year movement. And yet … Shelter is showing an +8.1% year-over-year price inflation still now in April. Yep. +8.1%. So, at the 34% weighting you can surmise that 2.75% of the inflation is, well, poppycock. That puts the actual present CPI somewhere between 2% and 2.5% which last time I checked is the Fed’s target. Used car prices are down -6.6% on the year (deflation). Gas utilities are down -2.1%. Medical care was only up +0.4% on the year. Food and transportation, though, are still showing higher annualized price increases. It is interesting to hear people talk about a slowing job market as Job Openings (JOLTS) started the year at 11.2 million and are now at 9.6 million. I am not sure I have ever heard nearly 10 million unfilled job openings described as a “slowdown” before, but you do you boo. Now, the CEO of ZipRecruiter did come out and say, “demand for recruiting services is declining” – which may mean things are slowing down (and also may mean hiring is so easy right now less people feel the need to use recruiters, but I digress). I do think there is no question that companies are paring back new hires, but I also think some industries (see: tech) were way, way, way over-hired. Bottom line, I don’t see anything contradictory (or complicated, for that matter) about saying these two things at once – (1) The job market is good; (2) It may be headed towards “less good” than it has been. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Today's Post - https://bahnsen.co/42ACgWM The total amount of commercial bank deposits that have left the banking system since the Fed began hiking rates is now just shy of $1.1 trillion. Money market mutual funds have taken in $751 billion. Of the total aggregate move higher in the S&P 500 so far this year, 93.5% of it has come from the 20 largest companies in the index, with 6.5% coming from the remaining 480 companies. This is not the stuff sustainable market moves are built on. CPI comes tomorrow along with more hand-wringing on the debt ceiling. Good times … Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Today's Post - https://bahnsen.co/3HL0cPd There are reports about the White House being open to a short-term debt ceiling increase, and I actually don’t doubt the White House would do that, or even that they may be willing to give up some energy permitting reform as a trade-off to getting that done. What I am skeptical about is whether or not the Republicans would agree to that (it is possible, but not assured) and then whether or not Democrats would agree to the energy side of that (I consider that improbable). We shall see. 43 Senate Republicans signed a letter over the weekend supporting the House measure for some spending restraints tied to a debt ceiling hike, so even apart from House blockage, if a clean hike is put forward, it faces a filibuster in the Senate. More and more Democrats are wanting some negotiations to take place. A lot of eyes are on what may or may not happen with FDIC coverage in light of the current regional bank saga: Congress sets the statutory limit on FDIC deposit coverage, not the executive branch and not the FDIC itself. The key word here is “statutory.” There is not a lot of Congressional momentum for broadly increasing FDIC limits, though there probably would be if some legislation came forward with nuances (i.e., company payroll accounts, etc.) The FDIC has the authority to name a bank a “systemic risk” and therefore ensure all of its deposits (as they recently did with Signature Bank and Silicon Valley Bank two months ago, but did not need to do with the First Republic since JP Morgan took over) “Big” banks already have systemic risk classifications (and received various increased regulations out of the Dodd-Frank legislation because of the SIFI classification). The aforementioned labeling of SVB and Signature as “systemic risks” happened ad hoc Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Today's Post - https://bahnsen.co/3VABmav I think this is a good week to do something many people will not be expecting.  I don't do clickbait, and I loathe the sensationalism of most financial writers.  But because most financial writers make their living writing about finances and I make my living managing real finances, I have never been captive to the sensational.  I can just call balls and strikes, be my authentic self, and share a point of view that I believe is rooted in truth and cogent thought.  I can be wrong, but I am not ever melodramatic. So when I say this week's Dividend Cafe may be unexpected, it is more about the sentiment and buzz in the air these days, not about me or any "shock and awe" I am going to deliver.  And in fact, the surprise may take the opposite shape of what you expect. So jump on into the Dividend Cafe, and let's look at the shockingly unexpected news that, wait for it - the American economy has not been the dystopian nightmare many have assumed it to be. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Today's Post - https://bahnsen.co/3VGvMUb A huge theme right now in market punditry is that small caps are under-performing big caps, and that this speaks more to macroeconomic reality than the fact that big-cap companies have mostly hung in there. As the reasoning goes, small-cap companies are more dependent on banks and financing and credit conditions and so struggle more than large-cap names in periods of fed tightening or bank distress. Of course, the corollary to this is that small caps underperforming going into a recession has always led to small caps out-performing coming out of a recession, but all of this is much more useful in hindsight than foresight. But I would say that I think small caps lagging large caps in periods like this is less related to credit conditions and more related to economic growth. Small cap names in the public sector are more tethered to revenue growth than big cap names, as big cap names have far more control over margins than small cap names do. Revenue is the most tethered to economic growth, and small cap names are more tethered to revenue. If we could look at an index of non-public small businesses, I would imagine it would reflect far more reliance on credit conditions (and of course, the economic cycle), but alas, such an index of non-public small businesses does not exist. But within the universe of publicly traded small cap names, my operating thesis is that revenue growth follows economic growth and big-cap names have more levers at their disposal to squeeze earnings out of slowing revenues than small cap names do. I have no idea when the cycle bottoms and when it turns, but I do know small-cap’s valuation relative to big-cap is looking quite interesting right about now. Take it for what it is worth. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Today's Post - https://bahnsen.co/42hbBOA So the Fed today raised rates a quarter point as expected, now to a range of 5%-5.25%. They indicated a “wait and see” approach about the next meeting though futures right now reflect a 91% implied probability that they are done raising rates. The language change of their statement implies that this is correct – this time, they are really done. TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Today's Post - https://bahnsen.co/3LLhr5A Regional banks were hammered today as clearly, the fear is contagious at this time, with some major regionals down -15%, -28%, and even others still down -9% to -12%. Short selling has picked up substantially in this space, so there is a need to watch it rationally and not technically. The basic criteria for them to look for are easy – high amounts of low-rate mortgages on the books, a big gap between mark-to-market values and posted values of the bank’s assets, and the existence of commercial real estate. The average 3-month CD rate of a bank with $10-50 billion in deposits has gone UP by 0.24% since Silicon Valley Bank failed. The average 3-month CD rate of a bank with over $250 billion in deposits has gone DOWN by 0.36%. This is basically the story of what has gone on – a 60 basis point competitive disadvantage for small banks versus big banks in less than two months. So that the Fed would be looking to hike rates in this environment is an act of sheer ignorance, and some may say malice. More on that tomorrow. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Today's Post - https://bahnsen.co/419OGnL The big news of the week has been First Republic Bank’s fate, which at midnight last night was still up in the air. By 3:30 am ET, the situation was clarified in the newswires – First Republic was put into FDIC receivership, and the FDIC was concurrently entering a purchase and assumption agreement with JP Morgan. All 84 offices of First Republic Bank in all eight states they are present will open as branches of JP Morgan immediately. JP Morgan has assumed all deposits and essentially all assets. Banking customers retain FDIC protection, and JP Morgan backs uninsured deposit levels effective immediately. Customers do not need to do or change anything to have all this affected. This covers $229 billion in assets and $104 billion in deposits. JP Morgan and the FDIC have entered into a loss-share agreement on the residential and commercial loans of First Republic, and the FDIC estimates it will lose a total of $13 billion in all of this. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Today's Post - https://bahnsen.co/3ncX8V7 The subject of bank stability has really been a big conversation topic since the failure of Silicon Valley Bank and Signature Bank back in mid-March.  People have wondered who was to blame, what went wrong, what could have been different, and what else is still going to happen that we may not know about. I have written in these pages already about Sunday afternoon dramas and the market instabilities that generally create such events.  Notice how I worded that, for it was intentional.  Sunday afternoon dramas do not create market instabilities; market instabilities create Sunday afternoon dramas.  And as we navigate through a change in the present financial cycle, a little perspective is warranted on what has been driving financial cycles.  In fact, if we do this well we may just understand not only how this fits into Sunday afternoon dramas and the broad reality of market disruption risk; we may also understand a lot more about the federal reserve, interest rates, and basic financial behavior. So let's jump into the Dividend Cafe ... Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Today's Post - https://bahnsen.co/3oR1amD Rally day and then some as earnings continue to outperform expectations. Add that to a weaker-than-expected economy (because everyone knows bad news is really good news in Fed-bizarro land), and voila – the Dow goes up over +500 points. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com