Dear Valued Clients and Friends –
It was a Dow kind of day in the markets and not a Mag 7 kind of day. There is a little bit of Presidential election handicapping in today’s Dividend Cafe. There is actually a lot on all the normal categories. And with summer days now lasting about 21 hours, you have plenty of daylight in which to read this.
Dividend Cafe on Friday offered our top ten thoughts on artificial intelligence in the current investing environment. You may have heard that it’s sort of a hot topic… The written version is here (my favorite), the video is here, and the podcast is here.
I would love to remind you all that The Bahnsen Group YouTube page has become a wonderful hub for all video clips, short reels, video interviews, and longer Dividend Cafe.
Off we go…
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Market Action
- The market opened up +60 points or so and then rallied higher between an Energy and Financials rally. The highs in the Dow didn’t hold, but the spread between that and the tech/Nasdaq world did.
- The Dow closed up +260 points (+0.67%), with the S&P 500 down -0.31% and the Nasdaq down over -1%
*CNBC, DJIA, June 24, 2024
- My Dividend Cafe on Friday talked about Artificial Intelligence, and used an analogy to food to make the point … The companies investors are focused on right now have been “backbone” companies, and I said that if AI were food, it would be like investing in the oven-maker rather than the restaurant. Over the weekend, I heard VC giant Chamath Palihapitiya say that refrigerator companies made money selling refrigerators, but no one made more money than Coca-Cola. It was a similar but slightly different way to make the point I was making – those who use a tool are the only reason a tool makes money.
- Speaking of companies “using AI,” with a h/t to Peter Boockvar: “Lucidworks surveyed over 2,500 business leaders involved in AI decision-making to uncover the 2024 reality of generative AI adoption. While enthusiasm remains high, the study reveals a notable slowdown in spending, with only 63% of companies planning to increase AI investments in the next 12 months (compared to 93% in 2023). The slowdown is driven by growing concerns around implementation costs, data security, and accuracy of AI-generated outputs.”
- Market sentiment in the Citigroup Panic/Euphoria Model remains in euphoric territory.
- The ten-year bond yield closed today at 4.23%, down two basis points on the day.
- Top-performing sector for the day: Energy (+2.73%)
- Bottom-performing sector for the day: Technology (-2.07%)
- For all of the talk about poor market breadth (including yours truly), there is currently 72% of the S&P 500 trading above its 200-day moving average, which is not bad at all.
- Bitcoin is down $7,000 over the last week, over half of that being today, and down nearly -20% from its last peak, which took place over three months ago now.
Public Policy
- With the debate coming this week, I will update you on some important aspects of the 2024 Presidential election. I do plan an extensive white paper on the market and economic implications of the entire election after the two conventions (a TBG tradition), and along the way some political handicapping is perhaps useful. I believe some of my resources in this department (outside of public polling) are extraordinarily valuable and a cost we incur for good reason. I also believe objectivity is important, and finding first-rate commentary from people speaking to what is and not what they want to be is worth its weight in gold.
- All that said, I continue to believe that Arizona, Nevada, Georgia, Michigan, Pennsylvania, and Wisconsin are the key states of the election. IF President Biden were to win those three Rust Belt states, and President Trump were to win AZ, NV, and GA (President Trump leads in those three states), then it would come down to the one congressional district in Nebraska (as they cast electoral votes by congressional district instead of the entire state) and we could end up either with a 270-268 outcome or, God forbid, a 269-269 tie, in the electoral college.
- That said, there is polling that indicates Virginia, New Hampshire, and even Minnesota are at play. I do not know if this is true or not, but if it is, it bodes better for former President Trump than President Biden.
- The most trustworthy (and expensive) resource I have in my Rolodex on the election has some very good advice on how to think about the information you hear: (1) Ignore the models; (2) Ignore the betting markets.
- I am one who believes that (a) The VP pick barely ever matters, and (b) This year it matters a lot. I do not believe that President Trump has actually made up his mind yet. And I will have more to say when he has announced his plans (in terms of what it means for the economic agenda).
Economic Front
- Wholesale used car prices are now at their lowest levels since March 2021 (down -24% from the peak). I will let others tell me how non-supply explanations caused used car prices to go up +64% and how non-supply explanations caused -24% price deflation in a period of inflation, but only for this product category. The government spending and monetary policy explanations of 2021 inflation have a tough time explaining the Manheim Used Car Index then, since then, and now. Occam’s Razor does better.
Housing & Mortgage
- Existing home sales declined -0.7% in May and are down -2.8% from a year ago (and a year ago, they were WAY down from the year before, etc.).
- Home price appreciation on a national basis is coming in at +5%, yet I hate even reporting that for two reasons:
- (1) There is no such thing as a national median home price, at least no more so than there is such thing as a national median weather, and
- (2) The price action is taking place in such a substantially lower volume of transactions it is distorted by a market not properly cleared in terms of supply/demand balance
- The lowest price appreciation is in the highest price tiers, and the highest price appreciation is in the lowest price tiers.
Federal Reserve
- I am surprised that futures still show a 34% chance of a rate cut in September, but I suppose it makes sense that it wouldn’t yet be zero. I stand by my call that they will not cut in September but rather will cut 50 basis points between November and December. Futures reflect a 78% chance of a cut by November and a 95% chance of a cut by December.
Oil and Energy
- WTI Crude closed at $81.68, up +1.16% today.
- Midstream energy was up +2% last week and remains one of the strongest spots of the market this year, up 18% for MLPs and 15% for midstream at large (which includes Canadians and C-corps).
- The phenomenal midstream analyst Hinds Howard reported that at last week’s JP Morgan Energy Conference, virtually every major midstream company that presented talked about:
- Strong balance sheets (check)
- Lower leverage than targeted (check)
- New capital projects/bolt-on acquisitions (check)
- Dividends (check)
- It is a wonderful environment to see – midstream companies making the case for how their leverage will not get too low. Not exactly the 2014-2019 world any more.
- I stopped reporting on rig counts quite some time ago because it was clear to me that the historical correlation between open rigs and production output had broken down as more oil was consistently being produced from fewer rigs (better efficiency, technology, etc.). That said, the rig count right now sits at 485, the lowest in 30 months, indicating about a 13 million per day capacity.
Against Doomsdayism
- As we work our way through Maarten Boudry’s Seven Laws of Pessimism, we arrive at #5:
The Law of Awful Attraction: If you don’t find bad news, bad news will find you.
Social media algorithms are the first component that creates self-fulfilling prophecies in modern technology. Our interest in bad news didn’t use to put bad news in front of us automatically. We may seek it out but it wasn’t headed our way. Social algos have changed that. The pessimistic impulse is more self-reinforcing than ever because of social media, and this is literally happening whether we want it to or not and whether we realize it or not.
Ask TBG
| “David talks a lot about the current top-heaviness of the S&P 500 and how a day of reckoning is inevitable. Is it possible for the few leaders to come down while the rest of the pack goes up? Or is everything overvalued currently to varying degrees, and so when the top drops, the rest always follow? I guess the heart of my question is, should we all be bracing for a correction across most of our portfolio regardless of our holdings?” ~ Ryan M. |
| When technology is over 31% of the index and communication services is another 9-10%, it is not likely that this segment can correct and have the index not drop. But as we saw in one of the most famous bear markets of all time (March 2000-October 2002), value and growth, the Dow and the Nasdaq, certain sectors, etc., can all behave very differently from one another. My own opinion is those who own the most expensive stuff, including index investors, have the most exposure. But no, I do not believe the impact of over-valued things will be the same with not over-valued things. I think the timing and attribution here are all unknowable. And I think timers will deeply regret their obstinance (that is permanently true). |
On Deck
- You may have heard there is a Presidential debate this Thursday evening. It is not just happening the earliest in Presidential debate history, but by almost three months early.
- The PCE data comes this Friday. The Personal Consumption Expenditures index is the Fed’s preferred price data for a read on inflation.
I saw some clients and spoke at some events in Atlanta over the weekend, and I am now sending this from Michigan, where I spoke at an event today and will be speaking twice at a symposium in Grand Rapids on Wednesday before heading to Dallas on Thursday. It is always fun to see so many clients, especially here in Grand Rapids, which has long been one of my favorite cities to visit out of the many in my rotation. Busy week ahead… #Fulltime.
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.
