TUESDAY – September 3, 2024

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Dear Valued Clients and Friends –

I know what you all are thinking right now – “How could you even think about markets and the economy right now after that USC win over LSU on Sunday night?” – and I get it.  But really, as much as I respect the obsession some of you have for USC football, for what appears to be a substantially improved defense, for a final-minute scoring drive for the ages, for two one-handed catches that will be catch-of-the-year candidates, and for all the things that make the Fight On spirit what it is…  But look my friends, I have a job to do, and despite your constant requests for me to sit here and commentate about the game and the win over SEC powerhouse LSU, there are things happening in the world that warrant our attention.  You’ll just have to forgive me for fighting on…

Dividend Cafe on Friday went around the horn to the state of the market, the state of the economy, some observations about the election, and more.  The written version is here (my favorite), the video is here, and the podcast is here.

The market’s sell-off today was mostly behind a further correction in semiconductors and big tech, but also followed fundamental economic weakness as pertained to manufacturing.  More below!

Off we go…

Market Action

  • The market opened down over a hundred points today, dropped a lot more thirty minutes later and then dropped more in the final two hours of trading.
  • The Dow closed down -626 points (-1.51%), with the S&P 500 down -2.12% and the Nasdaq down a pretty nasty -3.26%.

*CNBC, DJIA, Sep. 3, 2024

  • The market sell-off today will recalibrate a lot of the data points we brought into today (i.e., 35% of stocks were at 20-day highs – I assure you it is a lot lower now; 80% were above their 200-day moving average; I assure you that has dropped, too, but we’ll see how much tomorrow)
  • One thing that I imagine has benefitted from today’s sell-off is the ongoing relationship between “even-weighted” and “cap-weighted” S&P indices.  When the sell-off is concentrated in big-cap tech names, it drives the relative performance for “even-weight” higher, even if the total absolute performance is negative across the board.
  • The ten-year bond yield closed today at 3.84%, down -6.7 basis points on the day.
  • Top-performing sector for the day: Consumer Staples (+0.76%)
  • Bottom-performing sector for the day: Technology (-4.43%) – undoubtedly affected by the -9.5% drop in Nvidia today (down -23.3% from its high)
  • The challenge for many companies in big public markets is not their revenue or profit but the multiple being assessed by those.  And with a company like Nvidia, the profit margin is so high that valuing earnings or revenues by assuming those margins are sustained is, shall we say, risky (the gross profit margin is currently 76%).  As a multiple of sales, the current 25x is, well, much, much worse than the 65-70x earnings I frequently quote.  And 18x next year’s astronomical revenue expectations are not exactly what we would call cheap.

Top News Stories

  • Six hostages killed by Hamas were discovered in Gaza, one being an American, and several of them were alleged to be freed in terms of a ceasefire negotiation that had been under discussion.

Public Policy

  • Vice President Harris came out against the sale of U.S. Steel to Japanese company, Nippon Steel.  This unfortunate declaration mirrors the equally unfortunate declaration from the Trump campaign.

Economic Front

  • The Q2 real GDP number came in at +3%, better than the +2.8% previously reported.
  • ISM Manufacturing showed contraction once again (47.2 this month – anything below 50 is contraction) after a 46.8 last month.  New Orders were the weakest since May of last year.
  • Torsten Slok from Apollo sent a useful report yesterday on Chinese population demographics.  We know population growth is negative, and we know that with a fertility rate of 1.0, this population trend is going to accelerate, dramatically, for decades to come.

Housing & Mortgage

  • July pending home sales fell -5.5% on the month, as affordability continues to offset any other issues like high demand and economic fundamentals.

Federal Reserve

  • Not a lot of changes this week in the futures market: there is a 67% chance of a quarter-point cut at the September meeting and a 33% chance of a half-point cut.  There is a 100% chance of another quarter-point cut in the November meeting (the futures curve does not delineate between 25 in Sep./50 in Nov. or vice versa).  There is a 71% chance that by December, we will be down a full percent (or more).

Oil and Energy

  • WTI Crude closed at $70.41, down -4.27% to a new low in the year!
  • Midstream energy was up +1.4% last week as oil was down, natty gas up, bond yields up, and the S&P barely up.  Midstream’s correlation to everything has become very, very low.
  • Howard Hinds pointed out, and this is fascinating to me – ten years ago, MLPs were over 60% of the midstream universe market cap; today, they are 35%.  The C-corps and Canadians have grown in stature, and some MLPs have joined the C-corps via mergers and acquisitions (and conversions).
  • Oneok (OKE) doing a $5.9 billion acquisition of EnLink and a $2.6 billion deal for Medallion, all the while rallying +5% higher, shows that sensible M&A with strategy (and preferably, accretive to earnings) can still be received well by the market.

Ask TBG

“Why does QE and monetary inflation only affect asset prices (e.g., stocks, houses) and not real wages?”
~ Sergio
Monetary inflation DOES impact wages.  QE does not because it does not get into the circulation of the money supply but stays “on the shelf” in excess bank reserves.

On Deck

  • The jobs report for August will come out this Friday, Sept. 6

To all a good night…  and fight on!!

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.

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About the Author
David L. Bahnsen
FOUNDER, MANAGING PARTNER, AND CHIEF INVESTMENT OFFICER

He is a frequent guest on CNBC, Bloomberg, Fox News, and Fox Business, and is a regular contributor to National Review. David is a founding Trustee for Pacifica Christian High School of Orange County and serves on the Board of Directors for the Acton Institute.

He is the author of several best-selling books including Crisis of Responsibility: Our Cultural Addiction to Blame and How You Can Cure It (2018), The Case for Dividend Growth: Investing in a Post-Crisis World (2019), and There’s No Free Lunch: 250 Economic Truths (2021).  His newest book, Full-Time: Work and the Meaning of Life, was released in February 2024.

The Bahnsen Group is registered with Hightower Advisors, LLC, an SEC registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. Securities are offered through Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and HighTower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

Third-party links and references are provided solely to share social, cultural and educational information. Any reference in this post to any person, or organization, or activities, products, or services related to such person or organization, or any linkages from this post to the web site of another party, do not constitute or imply the endorsement, recommendation, or favoring of The Bahnsen Group or Hightower Advisors, LLC, or any of its affiliates, employees or contractors acting on their behalf. Hightower Advisors, LLC, do not guarantee the accuracy or safety of any linked site.

Hightower Advisors do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax advice or tax information. Tax laws vary based on the client’s individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor for related questions.

This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of HighTower Advisors, LLC, or any of its affiliates.

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