Dear Valued Clients and Friends –
I am thrilled to say that we have posted our oft-requested “Glossary of Investment Terms” to the home page (left side) of Dividend Cafe. The PDF is intended to be a useful summary of “jargon” we use a lot, which many readers and clients have requested. Have at it …
Dividend Cafe on Friday looked at what the Fed did last week under the new Fed chair, Kevin Warsh, and what they didn’t do. It evaluated the case for hiking rates, the case against it, and most importantly, the way the Fed is thinking about it (and many other things). The written version is here (my favorite), the video is here, and the podcast is here.
Off we go …
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Market Action
- Markets opened up big this morning and then gave about half of that gain back before then rallying back in the second half of the day to near the high of the early morning.
- The Dow closed up +693 points (+1.32%) with the S&P 500 up +1.48% and the Nasdaq up +2.13%
*CNBC, DJIA, August 3, 2026
- You may or may not have heard about the hedge fund that fell 67% in July on its levered AI bets (4-to-1 leverage on a basket of long AI stocks and a basket of short software stocks) and its subsequent selling of many positions at a huge loss to Citadel, one of the largest hedge funds on the planet. While I love a good dramatic story as much as the next guy, and do believe that SOME of the
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- Software rally early last week, and
- Slight reversal late last week, was related to their
- Short covering, and then
- Resolution of this debacle,
I do not think that the size of this whole ordeal indicates it was anything more than marginally relevant to last week’s market action. And I have to say, this post here is remarkable in demonstrating that this was not merely a hedge fund caught offside with leverage (it is always that to some degree), but also about the hedge fund just being wrong.
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- If I said to you on July 1 that the long end of yields would blow out as they did in July, that the semiconductor index would drop -17% on the month, that the MOU/ceasefire/fantasy of peace in Iran would disintegrate into a fog of reality, and that the Yen would make multi-decade lows, would you have believed me if I said, “and the S&P 500 will be flat on the month, and the breadth of the market would improve with 62% of companies above their 200-day average escalating to 69%?”
- The ten-year bond yield closed today at 4.68%, down six basis points on the day
- Top-performing sector for the day: Communication Services (+4.30%) behind big rally in mega-cap tech
- Bottom-performing sector for the day: Energy (-1.23%)
- Herein lies the whole debate within the current mega-cap universe: Who is spending wisely? Will all the spending be overdone? Will some of the spending be overdone? Will some rationalize an ROI and some not? If there is a payoff, how quickly will it come (can the cost of capital be regained before the assets depreciate)? How will this all be paid for? If some of that answer is debt (it is), what will that cost ultimately be? As the numbers below are QUARTERLY spending figures, you can hopefully see why, well, a lot is on the line in the answers to these questions.
Top News Stories
- President Trump announced Sunday morning that he had changed his mind on renewed attacks on Iran after Saudi Arabia asked him to refrain. There is a part of me that feels irresponsible in continuing to update the ongoing repetition of things here, but I guess it is what it is. I am going to just type it now with no time stamp so I can cut and paste for the future. “The U.S. threatened a big attack, but then decided not to as ‘talks are underway.’ The U.S. wants the Strait open and an end to Iran’s nuclear program. Iran says no.” And by the way, Iran says no talks are underway.
Public Policy
- I put the Treasury Department’s interventions to support the Yen on Friday below under FED, but it could have gone in the Market Action or Public Policy sections. And if we had a category for “Really??,” it could have gone there.
- It appears the Blanche nomination for Attorney General may be salvaged. It does not appear to be the same for the SAVE Act. I don’t want to say that a budget reconciliation bill has no chance (many good people are working on it), but I will say that I remain befuddled as to where the votes will come from. And as for the President’s hope to kill the filibuster, I remain confident that Sen. Thune will hold the line with the GOP majority to not let that happen.
- Polling suggests tomorrow’s Senate primary in Michigan is over before it started, with most polls showing Democrat socialist, El-Sayed, with a double-digit lead over his primary challenger.
- 25 states have sued the administration over its new use of Section 301 of the Trade Act to try to reimplement tariffs previously declared under IEEPA and subsequently declared unconstitutional.
Economic Front
- Real GDP increased +1.5% (annualized) for Q2, well below the +2% consensus expectation. Nominal GDP growth actually exceeded expectations, but the inflation deflator was higher than expected. Consumers did what consumers do, and data center construction (+15.2%) drove all business activity. Ex-AI investment GDP growth would have been cut in half.
- July ISM Manufacturing was up nicely (55.6 vs. the estimate of 53.9). This is the seventh month in a row of expansion (not just in the U.S. but globally). It was also the first month of employment expansion in almost three years.
Housing & Mortgage
- I don’t much mind a 30-year treasury above 5%, and I certainly don’t mind a ten-year around 4.65%. But a 30-year mortgage now back to 6.83%? Well, that’s not “unfreezing” activity in housing any time soon.
Federal Reserve
- As confident as I am in Chairman Warsh, I absolutely agree with the analysis I have read that it is important for the chairman to control the narrative. Much of the media chatter before, during, and after last week’s FOMC meeting was standard media incoherence, but if markets were to believe that Kevin Warsh has lost control of his committee (which is what several good friends of mine wonder), I do believe it would substantially hurt the efficacy of his intentions. I am a believer in his “reform” message, but I was also once optimistic about “DOGE” too. And as one analyst reminded me this weekend, “drain the swamp” didn’t end well, either. But no, I am not negative on the intentions of Chairman Warsh, and hope Friday’s Dividend Cafe laid out the why behind that effectively.
- The U.S. Treasury intervened to support the Yen for the first time in over a decade on Friday (selling Euros to buy Yen). That this highly rare and noteworthy action happened is tied with the other news surrounding it – the story was initially picked up because the Treasury Secretary scribbled it on a handwritten to-do list in the cabinet meeting at Camp David, and a photographer picked it up. You can’t make this stuff up.
- Now, what are we to make of the U.S. coming to the help of the Japanese in buying Yen? Well, for one thing, I don’t actually believe they are doing it to help the Japanese. I think they are concerned about the Bank of Japan selling Treasuries to support the Yen, and so by buying Yen, they hope to backdoor keep pressure off U.S. yields in the event Japan becomes a forced seller. They can’t say it, but I can.
- The Fed’s balance sheet expansion this year has been equivalent to 25 basis points of reduced rate in liquidity and monetary easing impact. Therefore, it stands to reason that if what one wants is a quarter-point of tightening, they can get it via balance sheet reduction (or freezing) before the fed funds rate enters the fray.
Oil and Energy
- WTI Crude closed at $80.21, down 5.27%
- Midstream overall was down about -2% last week, but MLPs, in particular, were up about +1%. July was up across the board (third positive month in a row), and the YTD return for the sector sits around +27%.
Ask TBG
| “How is the S&P average P/E ratio calculated? For decades (in my mind at least) the mean of the S&P P/E ratio has been quoted in financial musings at 15-17x. Yet over that time period, I do not recall a sustained period of it being below the mean. I do recall multiple sustained periods when it has been above mean – usually in the low to mid 20’s. If my recollection is accurate, it seems like the mean would have to adjust upwards at some point.” ~ Neil B. |
| Fair point – based on math … However, the mean got pulled from 15.5 or so to ~17. The P/E was below 14 post-crisis for some time, and it was below 10 coming out of several recessions in the last 50 years. This chart sums it all up well. |
On Deck
- More earnings reports and a MASSIVE client email on Wednesday morning
- A Dividend Cafe on ten indispensable economic tenets that we must maintain as if our lives depend on it
More to Chew on
- The government and groceries from Bloomberg’s perspective
- The Wall Street Journal pulls no punches on Warsh, the Fed, and the absurd response of the ankle-biters
- Sauce for the goose?
Enjoy your Monday night. Just a few more weeks of this insufferable period of no sports to watch between the NBA season ending and college football beginning. Fall is almost here.
With regards,
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
www.thebahnsengroup.com
The Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet.
