Dear Valued Clients and Friends,
I am not going to lie. I regret committing to do a Dividend Cafe today. It is not because I begrudge writing the Dividend Cafe. I think I have said before that writing the Div Cafe each week is one of the great blessings of my professional life (and the research and reading that goes along with it). Rather, it is because I just completed next week’s Dividend Cafe last night after basically four days of non-stop writing – that is, the annual Year Behind, Year Ahead white paper. As the final product turned out to be very close to 10,000 words, 26 pages (in a Word doc), with 20 charts, it was, more or less, equivalent to FOUR Dividend Cafe weeklies. So, hopefully, you can see why my brain is not in more Dividend Cafe writing mode right now.
But really, my regret is not so much related to being fatigued or drained (of all the negative things I can say about myself, getting fatigued is not really one of them). My challenge is that I have no idea how to write this week’s Dividend Cafe without blowing the surprises in store for next week’s Dividend Cafe. It is hard to spend 96 hours entrenched in data from last year’s markets and entrenched in commentary on the year ahead and not want to let it all out. But alas, the process must play out, and as the design team and editorial team and all the processes that now play out logistically prep next week’s white paper, I will surely find something to say in this week’s Dividend Cafe.
What I thought I would do today is go through a few market-sensitive nuggets that are not covered in the Year Behind, Year Ahead paper, and just generally touch on some things making their way into the press and perhaps on your mind about markets, etc. If it proves to be a good one, I planned it all along. If it feels disappointing, I have been typing for 96 hours. =) Jump on in, and maybe you won’t feel let down!
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A job no sane person wants
It may seem like more of a political story than a market one, but by now, you probably know that the Republicans are about to have a hard time getting Speaker of the House, Michael Johnson, re-appointed. Very few doubt that he will end up getting placed, and the President-elect has come out full throttle to support him, but math being what it is, when the Republicans have a ONE-SEAT majority over the Democrats – ONE SEAT – it is safe to say that the “margin is tight.” And with one Congressman already swearing he will not vote to name Speaker Johnson as Speaker for the new session of Congress, things have been dicey.
I doubt the Speaker will win the job on the first ballot, and I am nearly certain he will win the job after a few ballots (maybe just two). In other words, this outcome is not really in question as much as how far the performative shenanigans will go before we get there.
If President Trump pulls support all bets are off, but for him to do that now would be a level of eating crow that I have never, ever seen him do. Johnson could win on the first ballot (I doubt it). He could end up pulling out and forcing the House GOP to find a new Speaker (I doubt it). And he could end up winning in a second or third ballot with horse-trading and deal-making (that’s my bet).
The market story here is not whether or not this takes two hours or two days. One way or the other, the House of Representatives will have a Speaker of the House, and that person will be a Republican. The market story is just whatever soft indication this escapade gives of how much chaos, or how much leadership, or what blend of both, we are in for in the months ahead.
A message I have seen too many times to count
In reading a lot of 2024 summaries from other market commentators and portfolio managers, I am seeing a lot of comments along the lines of “we were right that gold would be up a lot last year but our gold mining stocks did terribly,” or “we were right that commodities would go up but our commodity stocks have really lagged,” or “we were right about [some high-level theme] but the [specific strategy used to execute that theme] has not yet caught on.” This is not a rare thing, and it certainly is not a criticism of managers who are fessing up to it. It. Happens. All. The. Time. The main reason is that simply put, there is often a very wide disconnect between a “macro theme” and a “specific investment” – no matter how connected or correlated we may believe the two things to be. Sometimes, it is a timing thing – an investment application does correlate to a macro theme, but there is a lag between the two things playing out.
Other times, the manager’s chosen strategy was just not a good selection for the theme they were trying to play. I won’t get into specific names here, but I remember one reasonably high-profile market bear bragging in early 2009 that he had “called the demise of U.S. markets around the housing and credit bubble of 2008” but then having to slip in there that his chosen strategy to play such a [astute] call was to short the U.S. dollar and go long European stocks … The result? Down -55% for 2008 – by accurately calling U.S. turmoil.
Macro calls are hard to get right, and the timing of them is even harder. Specific calls attached to macro calls are even harder to get right, and the timing of those is even harder.
Investing outside of “thematic calls” or “tactical calls” according to an evergreen philosophy is not foolproof, and there will be inevitable ups and downs in the journey of such an approach – in fact, those inevitabilities are features, not bugs. But it leads to less opportunity for mistakes, mistiming, misguidance, and misallocation. And ultimately, achieves a better result with less landmines along the way.
More bipartisan than I get credit for
Those familiar with me and with the Dividend Cafe likely know that I try to be very transparent about who I am, what I believe, and what my own biases may be when it comes to commentary on public policy and macroeconomics. I confess to being a lifetime movement conservative, a proud Reagan supporter of the 1980s, and a permanent reader of National Review. I also, though, have been overwhelmingly critical of President Trump on many occasions and have taken far more flak from friends/readers on the right over the last 8-9 years than I have friends/readers on the left because of this commitment to objectivity. I don’t do partisanship well, and I have come to see it as an even greater problem as I have gotten older. Whether it is in my lane as a portfolio manager or just my overall beliefs and commentary about the lay of the land, I value truth-telling and calling balls and strikes more than I value partisan loyalty. Fortunately, I am in a position not to have to care how that bothers people.
The current lame duck President and the future incoming President (as in, two weeks to go until inauguration) each share something in common I am happy to critique on an extremely bipartisan basis … Both Presidents Biden and Trump have come out against the Nippon Steel acquisition of U.S. Steel, and both have largely done so on similar grounds (vague appeals to a nationalistic benefit in there not being foreign ownership of something as important as American steelmaking). It is largely a political position, not an economic one, and the particulars of the deal in question were overwhelmingly protective of labor unions and other special interest concerns that could often make such things “dicey.”
Why do I bring this up (besides to brag about my bipartisan criticism of the position taken by both Presidents)? This is not really about Nippon Steel or U.S. Steel. It is philosophical. I do not believe that this precedent stays with this company and this sector. Once we accept that a friendly company based in an ally nation offering to inject vitally needed equity capital into a U.S. company that desperately needs it when no other offers are forthcoming is an unacceptable deal, we have changed the rules of the road for our capital markets. Our free flight of capital – to move it out and to take it in – has made us the envy of the world. We have every right to restrict certain deals where certain national interests are clearly at play. This simply isn’t one of those cases. Jobs are going to be lost. The people we say we are trying to protect are going to be hurt. And we have messaged to the world that capital is not as free-flowing as we have said it is. It is a precedent worth paying attention to for the future of American capital markets and enterprise.
Quote of the Week
“Markets don’t respect anything but truth.”
~ Jim Haskel
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My long-time media relations guru, Alexandra Preate, has been named Special Counselor to the Treasury Secretary and will be moving to Washington, D.C., next week. She is a truly gifted and capable person, and I could not be happier for her. She will stay in close connection with The Bahnsen Group, I assure you.
I am back to New York City tomorrow to try and find a place for weather that is 50 degrees cooler than where I have been the last week. Next week is the official launch of 2025 for our eight offices (soon to be nine). Happy New Year to all, and I cannot wait for the white paper to come out next Friday! To that end, I already worked. =)
With regards,
David L. Bahnsen
Chief Investment Officer, Managing Partner
dbahnsen@thebahnsengroup.com
The Bahnsen Group
thebahnsengroup.com
This week’s Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet
