Dear Valued Clients and Friends –
Live from Newport Beach, we are back with a Monday Dividend Cafe around the horn!
Dividend Cafe on Friday gave me the chance to lay out my [politically untenable] thoughts on addressing the national debt fiasco and the need for improved economic growth. My ten or so ideas are at the written Dividend Cafe here (my favorite), the video here, and the podcast here.
Off we go …
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Market Action
- Markets opened down over -100 points today and got down as much as over -400 points before making it all back and closing modestly higher.
- The Dow closed up +35 points (+0.08%), with the S&P 500 up +0.41% and the Nasdaq up +0.67%.
*CNBC, DJIA, June 2, 2025
- So, who had “the month of May being the best month for stocks in 35 years” on their bingo card after the way April went? Well, all those who have studied history and absorbed the other foolishness of market timing at least knew it was possible, right? The point is not that “a May reversal rally was inevitable” – because it was not. The point is that “a May reversal really was possible” – and therefore, trying to time one’s way in and out of Presidential tweets or policy announcements and reversals and such is just utterly futile.
- The ten-year bond yield closed today at 4.44%, up two basis points on the day.
- Top-performing sector for the day: Energy (+1.15%)
- Bottom-performing sector for the day: Industrials (-0.24%) – the only negative sector
- The long bond Japanese yield that had seen its yield jump from 3.3% to over 3.6% is back below 3.2%, once again proving one of my favorite investment truisms: The United States does not have a monopoly on investment know-nothings who hype non-events and then have to take it all back three days later
- Credit spreads between BBBs and BBs are now record tight at 90 basis points, perhaps the most non-recessionary call one will find out there.
Top News Stories
- Ukraine pulled off a massive drone attack on Russian bomber planes yesterday, apparently 18 months in the making. It is believed the effort took out 41 Russian planes and did over $2 billion in damage. Russia and Ukraine are supposedly set to meet for [low-level] peace talks in Turkey today.
- Indications are that a long-awaited call between President Trump and President Xi is going to happen this week.
- Eight people were injured, but thank God none killed at a brutal terror attack in Boulder, CO yesterday, as an anti-Israel fanatic launched a flamethrower attack at innocent people.
Public Policy
- Last Wednesday evening a lot of noise was made over the Court of International Trade unanimously ruling that the tariffs implemented by the administration using the International Emergency Economic Powers Act were not legal. If this ruling were to stand it would negate $220 billion of the $260 billion of tariffs that have been enacted thus far. A federal appeals court subsequently allowed the tariffs to stay in effect for the next couple of weeks while the administration files its appeals. Sectoral tariffs in auto, pharma, and semiconductor still apply (they used Section 232 “national security” claims for their rationale.
- Many are saying that the real issue here will be what the Supreme Court ends up saying in the end. Others are saying that what matters is the way the administration pivots to use some other pretextual rationale for the tariffs besides the IEEPA (such as using Section 338). I would say that what most matters is how quickly the administration can get deals ready for announcement that make all of the legal challenges moot.
- The Senate Parliamentarian will soon rule on whether or not the Trump tax cuts being made permanent violates the Byrd rule on reconciliation (by extending outside the 10-year window). If the parliamentarian does rule that way, the Senate will likely vote to circumvent by putting the procedural question up to Senate vote which means it will go through without having to be subject to more ten-year sunsetting, but the Republicans would prefer to not have to go around the parliamentarian (to avoid the precedent it sets).
Economic Front
- The President says tariffs on steel and aluminum imports will go up to 50% this week. More than half of U.S. aluminum demand is served by imports, with Canada being the largest exporter to us. Expect a major impact to U.S. manufacturers who rely on steel and aluminum as input prices in their manufacturing. There are 80 jobs where steel is an input and 177 jobs where aluminum is an input, for every one steel and one aluminum production job (h/t Peter Boockvar). This seems, shall we say, pertinent.
- The May ISM Manufacturing number dropped to a five-month low (48.5) as New Orders drop behind tariff ambiguity. The biggest cause of Manufacturing weakness? Export orders! It turns out that retaliatory tariffs hurt our U.S. exporters significantly.
- Personal Income rose +0.8% in April, higher than expected.
- The 2024-25 Broadway season in New York just took in $1.9 billion across all productions, the highest in Broadway history (surpassing the pre-COVID record from 2019 and up +23% over last year). I will spend the rest of my life laughing at the “New York is dead” proclamations of 2020-2022, even if the Knicks couldn’t get across the finish line this year.
Housing & Mortgage
- Pending home sales collapsed in April, dropping -6.3% on the month, as tariff, economic, and stock market uncertainty more than offset what had been a modest improvement in inventory.
Federal Reserve
- The highest odds in the futures market indicate the next Fed rate cut in September and two cuts between now and the end of the year, though with a 30% chance of three cuts.
- All indications are that suspension of the Supplementary Leverage Ratio’s burdensome requirements on how banks count Treasury holdings against their capital requirements is coming this week. The Fed and the Treasury are supporting dollar-for-credit to capital for Treasuries, a move intended to promote bank ownership of Treasuries and to avoid penalizing banks for holding risk-free assets on their balance sheets (versus other assets that understandably have a different risk weighting).
Oil and Energy
- WTI Crude closed at $63.12, up +3.83% on the day.
- One of the major stories in recent years regarding world oil pricing and supply has been the opposite movement between U.S. supply growth and OPEC supply growth. For three years, the OPEC bloc supply has declined quarter by quarter by quarter while U.S. supply has increased. This has resulted in a market share shift for OPEC, going from 40% to 36% of global supply.
- The move higher in oil prices today, following the OPEC+ announcement over the weekend of increased production plans, reflects the reality that markets had already priced it in, and then some. There is also the reality that Russia can claim it is increasing supply all it wants – it may not have the capacity to do so. Other supply disruptions (Canada, Libya, Iran) all make some of this moot. It is not a great environment for U.S. producers right now, but the bottom has not fallen out, either.
- Midstream did not really participate in last week’s stock market rally, though LNG export names had a good week. MLPs may finish Q2 negative, marking the first negative quarter for MLPs in three years.
Ask TBG
| “I wanted to ask you today about Japan. I’ve heard you speak often about Japanification, and now there seems to be rumblings in the news about a developing situation over there concerning their bond market. I can’t make sense of it. Something to do with their 40 year bonds and questions about possible Bank of Japan intervention. Of course there is the usual fear based click bait articles with their usual dire warnings. Is it something for us to be aware of? Are there spillover risks to the U.S. and global economy? Can we add this dynamic to 2025’s year of uncertainty?” ~ D.B. |
| The Japanese long bond sold off a little bit for a few days and has now rallied hard, with the yield even lower now than when the sell-off started. I think fear and clickbait are a part of it, but also just sheer incompetence from those who have been discussing it. One of the hardest parts of my job is discerning who is a charlatan from he who is just a plain old moron. There are lots of both around. |
On Deck
- Dividend Cafe this Friday is going back into graduation mode to offer updated counsel and advice to the young people of our world. Whether a new high school or college graduate, the focus this Friday is on the practical and real. A Dividend Cafe not to be missed.
I am excited to be in the Newport Beach office for the next two weeks with no travel whatsoever – a June gloom miracle. Reach out, as always, any time.
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.
