Dear Valued Clients and Friends –
Now, this is a day for the history books. A Nasdaq down 1,000 points at my 3:30 am wake-up, closing down over -600 points (-3.1%), with the largest company in the world giving up $600 billion of value in one day, and yet the Dow up +289 points. Crazy and historical. More in today’s Dividend Cafe.
Dividend Cafe looked at week one of Trump 2.0 (now called Trump 47) with a particular focus on what we can glean from the first 45 executive orders. 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
- The market opened down -200 points today as the Nasdaq and S&P were getting pummeled, but rallied throughout the day to close at a high of a day, +500 points from its low.
- The Dow closed up +289 points (+0.65%), with the S&P 500 down -1.5% and the Nasdaq down -3.1%.
*CNBC, DJIA, Jan. 29, 2025
- So the market story of the day was the -3.1 drop in the Nasdaq led by a -17% drop in Nvidia, all catalyzed by the news that China’s Deep Seek AI tool is surpassing ChatGPT in usage and therefore requiring less complex chips from the likes of Nvidia. It is, ultimately, a valuation story, too. With valuation offering no margin of error, excessive valuation always becomes a problem, eventually. Fundamental news becomes a heightened problem when it is coupled with excessive valuation. That is the issue here.
- The big beneficiaries today? Treasuries! The ten-year bond yield closed today at 4.53%, down nine basis points on the day.
- Top-performing sector for the day: Consumer Staples (+2.85%)
- Bottom-performing sector for the day: Technology (-5.58%)
- Coming into today the Citigroup Panic/Euphoria Model was at a level of euphoria not seen in years. Additionally, Inside Selling is the highest it has been in over a year.
- An issue under the surface of the Technology sector that has to be understood: It made a new high recently, but with only 61% of its stocks in an uptrend. The last two highs the sector made, over 80% of its stocks were in an uptrend. The breadth has been weakening even as the top-heaviness has been increasing.
- Only 78 out of 500 S&P companies have reported quarterly results so far, so it is just too early for me to start to comment on where earnings season stands
- A lot more about today’s story will be unpacked in the days and perhaps months ahead. It is not possible in 24 hours to know if the whole AI/hyper-scaler story has become unwound from the release of one successful app. It is possible, though, and at the very least, the thesis of gazillions of dollars being spent on advanced AI chips is being called into question now. It is the questioning of a fundamental thesis that is unnerving because a lot was riding on that fundamental thesis, and I happen to believe a greater than 100% likelihood of that thesis was already priced in (the key words being “greater than”).
Top News Stories
- I’ll elaborate more on the policy side of this below, but one of the big news stories of the week was that Colombia refused to take a plane full of migrants in America illegally that the new Trump administration was deporting, and then President Trump threatened a 25% tariff, and then Colombia took the plane – all in a day or two.
Public Policy
- Attempts to limit China’s access to U.S. technology, in this case chips and chip equipment, have very likely incentivized China to develop on their own, and becoming more independent of U.S. capabilities in the process. China may not only go away as a customer, but may become the #1 competitor as well.
Economic Front
- The 223,000 initial jobless claims last Thursday were pretty benign, in line with the low unemployment and healthy jobs picture we have had for quite some time. But it is definitely worth noting that the 1.9 million continuing claims were the highest read there since November of 2021.
Housing & Mortgage
- Existing home sales increased +2.2% in December and were up +9.3% versus a year ago. But the full-year total for 2024 was the lowest in thirty years! We are down over one million house sales per year from the pre-COVID level of activity and down over two million per year from the levels seen during the COVID years.
Federal Reserve
- The Fed meets tomorrow, and the FOMC will announce that there will be no rate change on Wednesday. The odds of a possible cut in March move to 32%.
Oil and Energy
- WTI Crude closed at $73.10, down -2% on the day.
- Crude oil production will always get the most discussion from pro-energy advocates and from the media for the simple reason that it is understandable and easy to attach to slogans and platitudes that don’t require much explanation or understanding. “LNG exports” is far more esoteric than “drill baby drill” – even if the former is a bigger deal for the American energy story than mere daily crude production is (right now). One year ago today, President Biden froze any further permit approvals for LNG export terminals. President Trump, last week, repealed that order, and the reality is that our capacity for exports has been reached until we have new and additional infrastructure to support more.
Ask TBG
| “Can you please explain the relationship between a stock’s dividend yield and its price? For example, imagine a client has $1MM invested in your TBG dividend portfolio. What happens to the dividend yield as the value of that portfolio rises and falls, say 10%?” ~ Joey L |
| It is math. A $1 million portfolio creating $40,000 in income has a 4% yield because $40,000 divided by $1 million is 4%. If the value of the $1 million becomes $900,000 then the yield is now 4.44% because $40,000 dividend by $900,000 is 4.4%. The dividends paid have absolutely nothing to do with the share price, nothing. It is why investors have to understand that “dividends” and “dividend yield” are measuring two different things. Let’s reverse your question. What if the portfolio is up 10%, and the same 40k of dividends on a $1 million investment are being paid? Now, the yield is 3.63%, but the investor is 100k richer, and the dividends haven’t gone down a bit. Is that good or bad (rhetorical question)? So what is better in the above two issues – a 3.63% yield or a 4.4% yield (for the investor who was already invested)? I hope the answer is obvious. But NEITHER scenario points to the only thing we care about. One can focus on a 10% move higher or a 10% move lower, but it is an idiotic thing to focus on unless one needs to imminently sell those stocks, in which case they shouldn’t own them. One thing being ignored is the growth of the dividend payments. I am not interested in the $1mm being higher or lower 10%; I am interested in the 40k being higher or lower. If the dividends grow 7%, and the portfolio grows 10%, now I have a 3.9% yield, lower than when I started, but with 100k more value, and more importantly, 7% more income. And the greatest scenario – a 10% drop means a 4.7% yield as income is higher and prices lower – and I can use these elevated dividends to buy depreciated shares, the source of the elevated dividends. Rinse and repeat. Or alternatively, if one needs the cash flow, they just take their raise, which is 3x the inflation rate, and ignore the noise of share prices. Either way, the withdrawer and the accumulator are both winning. Yield is just a math result: income dividend by current value. The actual dividends and how they are growing regardless of price is the focus of the intelligent dividend growth investor. And yet, I suppose it bears repeating … Share prices eventually follow cash flow because of math. |
On Deck
- Weekly Portfolio Holdings Report coming to clients on Wednesday
Questions are welcome! Have a wonderful night …
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.
