Dear Valued Clients and Friends –
A little around-the-horn today with almost no drama…
Dividend Cafe on Friday talked about the true reality of modern finance, and how leveraged excesses always spill into, well, everything, eventually. The written version is here (my favorite), the video is here, and the podcast is here.
I was on Yahoo! Finance TV this afternoon talking about markets, amongst other things…
Off we go…
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Market Action
- The market dropped over -200 points in the first twenty minutes of trading and then zigged and zagged throughout the day, closing down but well off early morning lows.
- The Dow closed down -140 points (-0.36%), with the S&P 500 dead flat and the Nasdaq up +0.21%.
*CNBC, DJIA, Aug. 12, 2024
- Does anyone know where the Nasdaq was three years ago today? Well, it was 10.6% lower then than it is now, which amounts to a 3.43% return per year for the last three years. Doesn’t seem right, does it? Range-bound markets will do it for you.
- Speculative shorts on the Yen vs. dollar are basically non-existent now, meaning all the shorts are covered, and many are back on the sidelines buying time.
- The ten-year bond yield closed today at 3.90%, down three basis points on the day.
- Top-performing sector for the day: Technology (+0.92%)
- Bottom-performing sector for the day: Real Estate (-0.64%)
Top News Stories
- It is hard to write without more specifics or knowledge, but all indications are that Israel is preparing for serious escalation from Hezbollah and Iran.
Public Policy
- With the polls increasingly moving in the direction of Vice President Harris and the general momentum of the race and activities of candidate Trump, it is noteworthy that betting odds have moved from 70% Trump to now less than 40%. The 70% was immediately following the assassination attempt and before President Biden backed out of the race; the 40% now is after these last two weeks. Handicapping a race before Labor Day is tricky, but the people I talk to (inside the Trump campaign, adjacent to the Trump campaign, and adjacent to the Democrat Party) are all increasingly of the opinion that (a) Harris is more likely than not to win the Presidency, and (b) The GOP is more likely than not to take the majority of the Senate. The most important race in the country for markets is likely to be the Senate race in Montana between Tester and Sheehy.
Economic Front
- If I had to summarize the current reality of inflation in a sentence, it would be this: “There is absolutely no question that we are in a period of substantial disinflation, with supply chain issues largely corrected and money supply growth negative or barely positive; yet, this disinflation is not an even, proportionate line down, and so month by month you get noise.” (I didn’t say it would be a short sentence).
Housing & Mortgage
- I don’t think any chart matters more than this when it comes to seeing activity resume in the housing market. As long as the typical mortgage people actually have is 2.5-3% LESS than what a NEW mortgage costs, I do not believe transaction activity will pick up. 200-250bps off of the current mortgage (along with maybe 25-50bps more in average mortgage paid as some resets roll-off), and that spread converges. But 200-250 lower in mortgage rates is a ways off…
- If it is so obvious that we desperately need more housing supply, shouldn’t the homebuilders be attractive investments? That logic makes sense to me … but it also apparently makes sense to a lot of other people since the average homebuilding stock is currently trading somewhere between 117% and 165% of its own historical valuation. In other words, they are expensive, but likely expensive for a good reason.
Federal Reserve
- As I type, the futures market is dead even (50-50, literally) on a quarter-point rate hike in the September meeting versus a half-point rate hike. I believe they will make that call at the Sept 18 meeting with the benefit of the August jobs report, this week’s July CPI report, and next month’s August CPI report to inform the magnitude of the cut. So, a cut is coming – and data will provide cover to either 25bps or 50bps.
- That the futures market is pricing in a 70% chance of a full 100 bps out of the fed funds rate by the December meeting strikes me as aggressive, but 100% chance of 75bps of cuts is pretty telling.
Oil and Energy
- WTI Crude closed at $79.69, up almost +4% on the day.
- Midstream Energy finished UP about +1.5% last week, despite the violent sell-off that started the week across all risk assets. Many major midstream companies announced their individual results last week (quarterly earnings) and the bottom-up reality was very good.
Ask TBG
| “Isn’t it interesting that Warren Buffet owns more T-Bills than the Federal Reserve? What is that telling? Just curious about your take.” ~ Harry |
| Well, first, let’s clarify – Berkshire owns about $235 billion of t-bills now ($100 billion more than what they owned a year ago, largely because of their large sales of Apple that created proceeds to “park” in ultra-short-term government securities. And yes, the Fed owns $200 billion of T-bills. BUT, the Fed owns $4.5 trillion of treasuries total – 19x the amount that Berkshire owns!!! The key word here is “bills,” which are just Treasuries of a maturity that is generally six months or less. When you factor in all maturities, the Fed’s balance sheet is massive, and Berkshire has almost nothing other than bills. So, in other words, it is a statement about DURATION – Berkshire is using theirs as a CASH SURROGATE, where the Fed bought bonds as part of a monetary policy tool called quantitative easing. So I would say it is not telling anything, but that on an absolute basis Berkshire sold a lot of Apple and has “cash” to re-deploy, and the Fed has gobs of Treasury bonds but about a trillion less than they did two+ years ago. |
On Deck
- This week we get the July CPI report, as well as producer prices, retail sales, industrial production, and housing starts. It is an avalanche of economic data from which all kinds of bad analysis can be prepared!
Some of you may be watching former President Trump’s interview with Elon Musk on Twitter/X tonight. Some of you, I am quite sure, will not be. One thing I hope all will do is go to bed saying a gratitude prayer for all the blessings we enjoy. No matter what one believes about American politics, and I believe some things, I assure you, I am so grateful for so much, including this country and our Constitutional order.
With regards,
David L. Bahnsen
Chief Investment Officer, Managing Partner
dbahnsen@thebahnsengroup.com
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.
