Dear Valued Clients and Friends –
I cannot tell you how much fun I had writing today’s Dividend Cafe. There is a lot here and a strong focus on markets, and I can’t really say why I particularly loved writing it – I just did. Around the horn we go …
Dividend Cafe on Friday looked at the real story of “credit risk” in the current AI moment and what it means for all investors, not just those in the heart of the AI world. The written version is here (my favorite), and the video is here, and the podcast is here.
Off we go …
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Market Action
- Markets opened up +250 points this morning and held gains throughout the day but gave some back in the second half.
- The Dow closed up +214 points (+0.41%) with the S&P 500 down -0.51% and Nasdaq down -1.07%
*CNBC, DJIA, November 2, 2026
- Say what you will about the market in October (Nasdaq down -7.8% from its high in the first week of October; the S&P 500 down -1% on the month), but 65% of the stocks in the market were up 2% or more and nine out of eleven sectors were up on the month! 61% of the stocks in the index are now above their 50-day moving average. The even-weight S&P 500 was up +4.9% on the month even as the index itself was down almost -1%. October was an extreme rotation month within markets, to say the least.
- How can so much of the market be up and the total market be down, you ask? Well, it is so obvious in a cap-weighted index; you probably didn’t ask, but just humor me. It really is the polar opposite of the month prior, when the total market showed up even as a majority of names were down. The math of this is not very confusing when you consider that Nvidia is down -15% the last few weeks, Meta down -17%, and Google down a tad over -20%. That is the story, in a nutshell. Math.
- The storm in AI/tech plays is far more than just one story. That OpenAI raised so much less than it targeted ($11 billion versus $30 billion target) and did so at a $1.25 trillion valuation versus desired $1.4 trillion valuation feels like some water being sprayed on the story. They will likely get to $20 billion but have cut $10 billion off of the fundraising target. The Intel drop Friday (-29%) could be considered an outlier or something connected to deeper problems. That so many companies have recently raised so much equity and are now so far underwater from where they raised that equity creates a tough issue for future equity fundraising. Will markets accommodate the aggressive capital needs that lie ahead when this last round has resulted in such big losses so soon after the funding took place?
- The idea that people are saying “the S&P 500 is down to 19x forward earnings and that is cheap” is one of the scariest things being uttered right now. First, it is not true that 19x is cheap. Second, it is only true that the S&P 500 is 19x forward if a LOT of assumptions are made. Third, it is also only true if all those assumptions are made and everything executes perfectly within that. Believe the valuation is good; believe expensive things will get more expensive; whatever suits you … But don’t believe that it is “cheap” and that the future is all crystal clear.
- The ten-year bond yield closed today at 4.91%, down two basis points on the day.
- Top-performing sector for the day: Consumer Discretionary (+2.25%)
- Bottom-performing sector for the day: Energy (-3.97%)
- The top-performing sector of the last five years is obviously technology, right? I mean, with ChatGPT coming out and the whole AI story and the Mag7 and all the things? Right? Close. But …
- With Bitcoin hitting $77,000, I pulled this story up from “Top News Stories” to “Market Action.” A $6.3 billion successful hack at what was supposed to be the world’s safest crypto exchange is sure to become an even bigger story for stablecoins and the overall crypto world. “The largest bank heist in world history” took place late last week, and it happened where people thought they were going to “make their money safe.”
- A fascinating point about private credit … Default rates as measured by Fitch showed a 6.3% default rate in Q3 (though they include maturity extensions and other LME’s as defaults in their vernacular), and yet, the default rate for the supposedly troubled software sector, not to mention SaaS, was a whopping 0.6%. It was actually Industrials and Manufacturing that led the way with credit distress.
Top News Stories
- The Democratic Party primary challenger to El-Sayed in Michigan, Haley Stevens, shocked the political world Sunday afternoon by endorsing the Republican candidate, Mike Rogers. It remains to be seen how much impact this may or may not have on the race Tuesday.
Public Policy
- With the midterms coming up tomorrow, and my event with 2Way on Thursday to break it all down, I don’t feel the need to do any final handicapping, predicting, or analyzing. The only “change” I will say I have undergone since last addressing these two topics is that I have now spoken to enough people I respect to convince me that it is theoretically possible that the Democrats do end up losing the Senate seat in Michigan behind the severe problems they have with their nominated candidate, and yet still prevail in a majority position for the Senate, nationally. I have previously stated that such a scenario was likely impossible – that holding Michigan did not mean they would gain Senate majority, but not holding it did mean they would not. And that is still a fair thing to bet on, but it is not as sure a predicament as I previously believed. I have become convinced it is possible the Democrats lose Michigan but win enough other Senate seats to re-take a Senate majority. But the thing I have not changed on is that I consider it all 50-50 jump ball stuff (as far as total Senate outcome).
- You’ll be shocked to hear that spokespeople for the U.S. and Canada say they’re very close to having a deal, will be meeting in the coming weeks, and nothing appears set to change from the way things were before the recent tariff spat whatsoever. So that was fun.
Economic Front
- The Q3 GDP real growth number came in at +3.4% (annualized), mostly boosted by a lower-than-expected price deflator. Software and IT spend, and related categories accounted for nearly half of the net GDP number for the quarter. Year over year, real GDP growth sits at +2.1%, basically exactly where it was in 2025.
- The ISM Manufacturing Index increased in October (especially the production index, but also New Orders and, by a hair, the Suppliers Index). Only Manufacturing employment declined, which has been par for the course for quite some time (current manufacturing employment is lower than it was before Liberation Day tariffs began)
Housing & Mortgage
- The Economist says that 97% of U.S. homeowners now have a mortgage rate below the prevalent market rate.
- Rents were down -0.3% in October, according to the Apartment List National Rent Report. 32% of properties nationally offered a concession to get a lease deal closed.
Federal Reserve
- With the Nasdaq’s big drop in recent weeks and what has felt like increasing and material distress in certain pockets of the equity markets, I have continued to wonder if the Fed would really hike rates in December should those conditions continue. I know there are some who say, “What do Nasdaq prices have to do with monetary policy?” but to those people I can only say, “bless your heart.”
- And while some may cynically assume I am cynically saying, “the Fed is afraid of distress in the stock market” (where would anyone get such an idea??), I will actually say in a very non-cynical way that it is more complicated than that. Greenspan defended a Fed stock market sensitivity around the doctrine of the wealth effect (that is, what happens in the stock market does matter to the Fed’s mandate of full employment, because people live differently when they feel poorer – less consumption and confidence – and when they feel richer – more consumption and confidence). Like the theory or dislike the theory, but it can hardly be denied that Greenspan (and others since him had the theory. But in this case, there may be more to it than merely “wealth effect” reasoning. The AI story is the entirety of U.S. economic growth right now, and if the Fed sees market signals that it is coming under distress, they may very well conclude that the risk balance has moved towards the other side of their mandate.
- Is the futures market agreeing with me? We are at a 74.9% implied probability in the futures market of a rate hike in December, now. It had been ~90% before the recent market distress. So, not really, yet – but directionally, a bit.
Oil and Energy
- WTI Crude closed at $95.76, down -8% on the day.
- Midstream was up a massive +3% last week as the S&P and Nasdaq dropped. Oil was actually down on the week but midstream unsurprisingly benefitted from the underlying market rotation.
- Helping midstream performance were wonderful quarterly results and a wonderful market response to those results from some of the major midstream names. A lot more companies report this week.
Ask TBG
| “As I understand it, the 2008 crisis was in part caused by poor (or no) margin requirements on the issuance of swaps – and writing naked swaps where there was no underlying exposure. Then doing so multiple times for the express purpose of fee generation with no thought given to the underlying risk. I suspect that regulations now preclude some of that, but I believe naked swaps are still permitted and not all swaps have margin requirements. While most probably do, rapid changes in pricing would seem to have the potential to weaken those who face sudden margin calls. How much exposure do you see in this regard and is there a danger of margin requirements and collateral calls causing its own set of issues including a circular contagion given the increases in CDS pricing on AI debt?” ~ Pete R. |
| So the first thing we have to clarify is that there were not universal and mandatory margin requirements on credit default swaps before the financial crisis. Each counterparty certainly had their own requirements; they just weren’t enforced by a centralized exchange and regulatory framework. Private parties had their own deals as they had their own exposures, and could call for increased collateral (and did just that) when markets moved. That some actors in GFC were entirely driven by fee generation is indisputably true, but that can’t be the same people who were essentially the risk-takers, because the capital that was set on fire was exponentially more than fees ever collected … In other words, they actually believed it. The companies were reckless, wrong, and pathological, but they most certainly believed in the “underlying risk,” or they would never trade “all the equity value of the company” for “a good quarter of fees.” That said, naked CDS were common pre-GFC, but the real systemic damage was in synthetic CDO’s that amplified the practice. Buying a CDS without owning the underlying bond created a one-directional risk for the buyer. But selling that CDS without sufficient collateral is where the underlying systemic risk came from pre-GFC. So, to your question comparing it all to the current AI moment and the CDS story I wrote about Friday, we first have to recognize that initial margin is now required on covered transactions, and margin requirements around volatile prices now exist. Almost all credit default swaps centrally clear and I have yet to see one in the AI sector that does not. Regulated dealers have massive capital requirements which effectively did not exist pre-2008. A credit default swap can be written without owning the underlying bond, but that does nothing to increase systemic risk (the seller of the swap is the issue). Nothing in the current system can contain credit risk (nor should it). But nothing in the system is in the same stratosphere of the systemic risk that existed pre-2008. |
On Deck
- I am sure you heard there is an election tomorrow. My analysis of post-election implications for markets will be Thursday.
- Apple releases earnings this afternoon, and a gazillion other companies throughout the week
- The October jobs report from BLS comes Friday.
More to Chew on
- For all the talk about prices, Iran, and the economy, is this the issue that will most impact the midterms?
- Not exactly a distressed wind-down – a major law firm closes down, with $2.1bn of revenue and no debt
- This says a lot more about the Falcons than it does the Buccaneers. But also, it is just bizarre!
- Well, I’ve joked about it. But in the UK, jokes can be very serious
I may not be in a mood to forgive Lincoln Riley for the debacle at Wisconsin, but the whooping unranked USC put on #2 in the nation Ohio State Saturday night was something (and made the weekend tolerable after some intolerable things in Dallas Sunday I won’t get into). It has been a crazy year for all teams and all fans in both college and pro football, and I hope your team is alive and fighting, and good things lie ahead. As for your candidates tomorrow night, I don’t have time to delete a thousand emails tonight, so I will leave it all alone. Whatever happens tomorrow, may your friends and family be more important than anything in any race. Because they are.
With regards,
David L. Bahnsen
Managing Partner, CIO
The Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet.
