Dear Valued Clients and Friends –
It was a new all-time high in the Dow today, and we have a nice trip around the horn to cover things. I did get a little caught up in the Public Policy section on the Nippon/U.S. Steel deal, but I couldn’t help myself.
Dividend Cafe delved into a mentality many investors have, but worse, many professional money managers have, and suggests a counter to this destructive approach. Additionally, some concentration realities in the market, the state of big tech, the best economic indicator we have, and more. The written version is here (my favorite), the video is here, and the podcast is here.
I was on Bloomberg this morning talking markets, rotation, the election, and more. And I was on Fox Business’ The Big Money Show Friday talking tax policy and the election.
Off we go…
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Market Action
- The market opened up today despite an opening sell-off in the Nasdaq, and stayed up throughout the day, eventually closing pretty close to its high level of the morning.
- The Dow closed up +228 points (+0.55%), with the S&P 500 up +0.13% and the Nasdaq down -0.52%.
*CNBC, DJIA, September 16, 2024
- 146 days have gone by since the last rate hike, and what will this week be… a rate cut? This is the second longest period of time ever, but it is the strongest market return between a hike and a cut ever.
- The ten-year bond yield closed today at 3.62%, down three basis points on the day.
- Top-performing sector for the day: Financials (+1.22%) and Energy (+1.20%).
- Bottom-performing sector for the day: Technology (-0.95%).
- We talk a lot about foreign ownership of U.S. treasury debt and what it allegedly means (or doesn’t mean) for interest rate prospects, currency demand, etc. It may behoove us to look at foreign appetite for U.S. corporate debt, too. Foreign net purchases of U.S. corporate bonds are at record highs, indicating a high confidence in American economic prospects and suggesting that foreign investors are doing the exact opposite of turning their backs on the U.S. dollar.
- For the market to hit projected earnings of $280/share in the S&P next year (which still involves a forward multiple of 20.1x), you will have to see significant margin expansion from here (still).
Top News Stories
- A second assassination attempt in just around two months on former President Donald Trump was thwarted yesterday, as the Secret Service opened fire on the would-be assassin at President Trump’s golf course in Florida. The suspect was caught and apprehended, and today, charges were filed.
Public Policy
- The Biden administration appears to be punting in their planned blockage of the Nippon Steel acquisition of U.S. Steel, now saying they will wait until after the election to act, essentially leaving it to the next President to deal with it. Though initially opposed to the deal, the administration has now signaled a desire to delay their decision, likely for the purpose of buying time through the election.
- I have had over a dozen of you ask why I was so supportive of the merger between Nippon Steel and U.S. Steel despite both Presidential candidates [claiming to be] against it. My argument(s) for the merger goes like this:
- The deal comes with a commitment to spend $2.7 billion on refurbishing the Pittsburgh plants of U.S. Steel, capex that is desperately needed.
- The deal honors and does not alter the current collective bargaining agreement with U.S. Steel workers.
- The reason some labor unions oppose the deal is not because they disagree that capital is desperately needed at U.S. Steel. Nippon is the one strategic capital partner willing to do it. That U.S. Steel needs fresh equity capital is indisputable; rather, the opposition is because they want to see that capital come from a deal with Cleveland Cliffs, which would give cartel-like control to a single company (100% of blast furnace production). This means downstream manufacturers would pay HIGHER prices. This is all about trying to take one crony deal over another, more competitive market deal.
- Japan is an ally, not a foe. Blocking deals of ally nation companies buying other ally nation companies is absolutely outrageous and a precedent that no one wants to even think about for what it would mean economically.
- Once the Nippon deal is blocked, Cleveland Cliffs will come back – at a 45% discount to Nippon’s deal (lower than Cleveland’s own previous deal) – knowing it is the only bidder (this is what they have said, not my own forecast).
- Nippon’s investment is a classic market-based investment into U.S. manufacturing. I thought we supported that?
- The “protectionism” in trying to block this deal is unjustifiable on any rational grounds. Steelworkers are 0.6% of U.S. manufacturing employees and 0.05% of the total labor force. Yet as an input into production in other industries that employ exponentially more people, steel is vital in the economy (and therefore, cheaper and more competitive steel prices drive more job growth!!!). I support blue-collar workers!
- The market cap of U.S. Steel before the deal was announced made it the 925th largest public company in the country, right up near Columbia Sportswear and Zurn Water Solutions. Do we believe Congress and DOJ and DOT and FTC, etc. are to intervene in all companies of this size?
- Why would this deal HURT U.S. steel production? Are we to believe Nippon is buying our second largest steel producer (Nucor trumps U.S. Steel many times over) because they want to produce LESS steel?
- This deal would add capital to a company that needs it, would make a U.S. company stronger, would avoid an anti-competitive price cartel, and has no good economic rationale (let alone national security rationale) for blocking it. The ONLY reason one would oppose it is cronyism, which allows a competitor to acquire it (at a far lower price, hurting shareholders) and creates a price cartel (hurting those who buy steel as input and ultimately consumers). The attraction of foreign capital is a huge statement about the U.S. economy. Blocking such with no national security rationale is, well, anti-American.
Economic Front
- The NY Manufacturing Index rallied huge on the month, surprising to the upside with the expansion of +11.5 when a contraction of -4.0 was expected (and a contraction of -4.7 was what took place the month prior). New Orders led the way with a big rebound. This data is very volatile and, for now, should only be taken as what it is – a one-month report that was unexpectedly strong.
- The most interesting economic factoid from my weekend reading: There are 10 million people in America who have or receive a pension plan (defined benefit, receiving now or receiving in the future). That number was 30 million people in 1984. There are 90 million people who have a 401k plan (defined contribution) – and that number was also 30 million in 1984. 85% of government employees have a defined benefit pension.
Housing & Mortgage
- 39.8% of owner-occupied housing units in America have NO mortgage – a new all-time high. The number was just 32% in 2010. This is a remarkable (and very positive) data point.
- The Singapore office market is as strong as can be (good, new products, a culture where people are going to work, big cities employing people who put their clothes on and go to work). Other than not having a large backlog of antiquated class B and class C office inventory to work through, I cannot imagine why people believe office products are growing in price in Singapore but should not be in other desirable cities (because the “all offices are obsolete” argument would apply universally, wouldn’t it?)
- Speaking of offices:
Federal Reserve
- The odds have moved quite a bit towards a half-point rate cut on Wednesday this week (59% implied probability in the futures market versus 41% likelihood of a quarter-point). The odds are now 80% that we will be down 75-100 basis points by the November meeting.
Oil and Energy
- WTI Crude closed at $70.50, up +0.56% on the day.
- Midstream was up another +1.2% last week, with MLP’s themselves up +2.5%. Don’t look now, but midstream has massively outperformed five of the seven “mag 7” this year. “Mag midstream” has a ring to it??
Against Doomsdayism
- I know this section has been missing but I am motivated to keep it going. The World Bank’s updated report a few days ago shows 690 million people around the world living in abject poverty. That number was 1.1 billion in 2010, just fourteen years ago. So the number has been reduced by over 400 million people in just over a decade, and it should be added that the number has been reduced by over a billion people since the turn of the century.
Ask TBG
| “Ever since reading The Case for Dividend Growth, I have been fully convinced that the dividend growth approach is the right one to take when investing. In particular, investing in companies that are able to grow their dividend consistently is a way to invest in management teams with the right understanding of what a company’s goals should be and what its obligations to shareholders are in regard to capital return. I also have found a passion for working in non-executive roles at early to mid-stage startups backed by venture capital, at which ISOs are part of the compensation. Like many VC-backed startups, none of these companies have, at the time of my employment, been cash flow positive, let alone profitable, and even further from consistently generating growing profits to a level to facilitate growing dividend payments. In fact, I would guess most, if not all, never plan to accomplish the panacea of dividend growth and probably have never mentioned this at a board meeting full of VC partners. My question is, does this compartmentalization work? Is there a logically consistent position in which one can believe in a dividend growth strategy for all the reasons TBG does and yet has a career at early-stage VC-backed startups? Feel free to expand this to TBG’s outlook on the VC startup ecosystem and its place in the world of value creation.” |
| We really are talking about two entirely different things here. First of all, the easy part—of course, it is consistent to believe in the logic of dividend growth as an investor and to have a career in venture capital-backed companies. They complement one another; they do not contradict. Private market investing is often in our Alternative Investing bucket, and venture capital is a subset of that. It is a small percentage of the investing public that ought to even consider such a thing based on liquidity, risk, and the possibility of erosion of capital, yet it is a viable, attractive, and, where suitable, fascinating part of investing. We use dividend growth as a core building block for liquidity, diversification, some (but reduced) market beta), income, growth, growth of income, and basic compounding – where some allocation is appropriate for the lion’s share of investing. We see volatility as a reality but the permanent erosion of capital as, well, not. With VC investing, the potential of loss is real, the liquidity is non-existent, and there is no cash flow objective (immediate or periodic). The possibility of an ROI from long-term value creation is real and very much a part of our investing worldview – just not en masse. |
On Deck
- The Fed meets all day tomorrow and makes their FOMC announcement on Wednesday.
Have a wonderful night. Thank you for not emailing me about that dreadful Cowboy performance. And reach out any time!
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.
