The Dividend Cafe

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: [DividendCafe.com] https://bahnsen.co/3jErUVn TheBahnsenGroup.com

The DC Today - Thursday, Feb 9 - https://bahnsen.co/40IKvQA Ask Trevor “It doesn’t seem like stocks have a believable catalyst to go up from here, wouldn’t it be wise to sell stocks and buy a short term treasury for the guaranteed interest?” 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: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

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. Markets opened in the red by about 110 points but were back toward fair value within the first hour of the morning session. Dow: -207 points (-.61%) S&P: -1.11% Nasdaq: -1.68% 10-Year Treasury Yield: 3.63%%, down 4.7 basis points on the day. The 2/10 yield curve is inverted by over 80 bps. The 3mo/10YR curve is inverted by 108 bps. Top-performing sector: Real Estate was the best-performing sector today at -.29%, although all sectors were in the red. Bottom-performing sector: Communication Services are down -4.13%, largely due to Google being down over 7% on the day. WTI Crude Oil: $78.41/barrel, up +1.63% Links mentioned in this episode: [TheDCToday.com] https://bahnsen.co/3xdfw1m DividendCafe.com TheBahnsenGroup.com

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%) S&P: +1.29% Nasdaq: +1.90% 10-Year Treasury Yield: 3.68% (+5 basis points) Top-performing sector: Energy (+3.08%) Bottom-performing sector: Consumer Staples (-0.36%) WTI Crude Oil: $77.37/barrel (+4.40%) Key Economic Points of the Day: Bond yields have jumped 37 basis points since the 1st of the month on the short end of the curve The trade deficit came in at $67.4 billion for December, a tad less than expected. Exports were up +7.6% last year (energy had to help) and imports were up +2% on the year. Those divergent rates led to a decline in the trade deficit, but unfortunately, a decline of -2.5% in total trade for Q4 and -1.1% for Q3 brought total trade for 2022 down to just +4.4% versus a year ago. Links mentioned in this episode: [TheDCToday.com] https://bahnsen.co/3DPsyG2 DividendCafe.com TheBahnsenGroup.com

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. The market opened down -150 points, worsened a bit, and then steadily improved throughout the day. The Dow closed down -36 points (-0.11%) with the S&P 500 down -0.61% and the Nasdaq down -1%. 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. A clear by-product of the weakening dollar: Companies with high foreign sales are outperforming companies with low foreign sales. It would sure seem one of the biggest stories of January was narrowing credit spreads (note here the spread compression in Investment Grade corporate bonds over the last three months). This has facilitated one of the biggest bond market rallies I have ever seen. The ten-year bond yield closed today at 3.65%, up 12 basis points today Top-performing sector for the day: Utilities (+0.87%) Bottom-performing sector for the day: Communication Services (-1.31%) Nigeria presently ranks as the #1 nation in the world for use of cryptocurrency. Thailand and Turkey round out the top two. These three countries are known for the heavy presence of a criminal underground which may possibly (just maybe, possibly) explain some of this. Links mentioned in this episode: [TheDCToday.com] (https://bahnsen.co/3DKsV4G) DividendCafe.com TheBahnsenGroup.com

I have a view of where the United States is in its economic cycle that I have had for quite some time, and that has substantially informed many of the macro assumptions I bring to portfolio management. I have shared this overarching worldview many times over the years in Dividend Cafe and elsewhere, and I am constantly refining it, analyzing it, and even challenging it. It has the word “deflation” in it, though I really believe the term “Japanification” is a better encapsulation of my perspective. “Deflation” is often associated with “depression” and no one in their right mind believes we are in another “great depression.” And of course, the boom of inflation that we saw in 2021 and 2022 did not create a lot of discussion about the threat of deflation (like worrying about freezing to death in a heat wave). But temperatures do get very cold in the same places that they get very hot (I just made up that analogy right there). And as I have written before, there was nothing in the 2021-22 inflation that remotely contradicted my macroeconomic thesis. So what I want to do today is re-hash the greater macroeconomic view that I believe properly frames our perspective at The Bahnsen Group. Some history is needed, some updated data, and some general understanding of what is making this road to Japanification tick. I promise it won’t be boring. Okay, I don’t promise it won’t be boring if you are still reading desperate to get to some juicy tabloid gossip. But if you are still reading because you need a little more E-conomic talk and a little less E! Channel in your life, then you have come to the right place. Let’s jump in to the Dividend Cafe … Links mentioned in this episode: TheDCToday.com [DividendCafe.com] https://bahnsen.co/3JBih4f TheBahnsenGroup.com

ASK DAVID “Could you give us some tips on what we can do to fight ESG?” ~ Mark S. It is the subject of much obsession at places like National Review’s Capital Matters, and I am engaged in many efforts to fight for the interests of shareholders when it comes to the activity of corporate managers taking their P’s and Q’s from the radical and incoherent agenda of various fads and virtue-signaling alphabet soup movements. I have primarily noted that ESG has really been more of a marketing tactic for Wall Street to raise money at higher fees than anything else. But there is no question that there are many other consequences and intentions behind the movement, and that the movement’s lack of clarity and specificity as to what “environmental, social, and governance” principles they advocate has rendered it a moving target. I commend Aswath Damodaran of NYU for his frequent wisdom on the issue, and I will soon be posting more about general shareholder activism and rights and what TBG is doing in this regard. Links mentioned in this episode: [TheDCToday.com] (https://bahnsen.co/3JyLk8w) DividendCafe.com TheBahnsenGroup.com

ASK DAVID “When you talk about a stock on television, but then later end up selling as your viewpoint changes, do you publish or broadcast your new view somewhere?” ~ Tom As for the more practical aspect of your question, no, we really couldn’t possibly be responsible for “running a portfolio on TV” if you know what I mean. Updating what we have added and subtracted and bought and sold and when and why would require a really different forum to take on that responsibility. We are never making Buy or Sell recommendations on TV, but rather just speaking at a point in time as to what we are doing and why. People use that information in a number of different ways, but I would never recommend one use it as a holistic portfolio strategy (partially for the very reasons you cite). Our clients, obviously, see the whole enchilada week by week etc. (our WPHR is sent to clients every Wednesday, and yes, regulatory requirements render that a client-only communique). I hope this helps. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

ASK DAVID “Would you mind giving me your Cribb note version of your expectations on the USD’s devaluation now that Saudi Arabia (and probably others) are willing to trade oil for other currencies than the US dollar? If you expect a significant currency related (not just inflation related) devaluation, do you have an idea of how we can offset that?” ~ D.M. The main thing to say is that: Saudi has not yet done it, it will take a while to happen, it may happen at very small levels, and we do not expect a significant devaluation from this alone. We do believe it is a shot across the bow geopolitically, but not in fundamental forex (yet). The major thing for investors to understand is not that the collapse of the dollar is imminent (I wish I had one dollar for every time someone has suggested that or fretted over it in front of me over the last 25 years, for I would surely have a great deal of very spendable and exchangeable and useable dollars). Rather, it is that China is desperately seeking international legitimacy for their Yuan. The rest of this subject is mostly noise. Links mentioned in this episode: [TheDCToday.com] https://bahnsen.co/3JMMeP1 DividendCafe.com TheBahnsenGroup.com

Futures opened last night down -50 and were down -85 into the evening. This morning markets pointed to a down -265 open pre-market. Futures would improve in the next three hours before the opening. The market opened down just -80 points and then went positive before then steadily declining throughout the day. The Dow closed down -261 points (0.77%), with the S&P 500 down -1.30% and the Nasdaq down -1.96%. January looks to be the greatest month for bond market auctions in history, with every single auction printing below-market yields. More demand than supply across the yield curve; each auction of new treasury debt means one thing – these buyers don’t believe these yields will last. Only 29% of companies have reported Q4 results so far, so it is really too early, still, but thus far, we are tracking for year-over-year revenue growth of +4.2% and year-over-year earnings contraction of -2.9%. Full-year earnings estimates started the year at $225 on the S&P 500 and are now sitting at $220. The ten-year bond yield closed today at 3.54%, up two basis points on the day. Top-performing sector for the day: Consumer Staples (+0.07%) Bottom-performing sector for the day: Energy (-2.29%) Earnings in energy currently make up over 12% of the S&P’s earnings, but Energy is currently only 5% of the S&P 500 by weighting. That 7% differential between earnings contribution and weighting is the highest it has ever been. Links mentioned in this episode: [TheDCToday.com] https://bahnsen.co/3JqiqaH DividendCafe.com TheBahnsenGroup.com