DC Today is a daily missive from the Dividend Cafe of The Bahnsen Group. While the Dividend Cafe’s weekly market commentary is meant to be long-form, macroeconomic, and principle-driven, the DC Today’s purpose is to provide a daily synopsis of markets, politics, and current events. It will be short, sweet, and hopefully, informative. Our goal is to bring you the latest and most relevant market information and insights, written only by us. Please feel free to share The DC Today with your friends and family. And of course, we always welcome your feedback as to how we can make it more relevant and practical for you!

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Dear Valued Clients and Friends –

Greetings from John Wayne airport, where I am putting the finishing touches on this DC Today, hitting send, and heading back to New York City late tonight.  We have another full DC Today, including all the latest updates on the Senate bill.

I was on Varney this morning talking dividend stocks Gilead and MetLife and how dividend growth investors make money in flat markets …

Off we go …

Market Action

  • Futures opened last night dead flat and stayed there into the evening.  Very early this morning, they pointed to a +120 point open pre-market, but that faded into the opening bell.
  • The market initially opened down -100 points and zigged and zagged in that range throughout the day.
  • The Dow closed down -85 points (-0.26%) with the S&P 500 down -0.08% and the Nasdaq up +0.41%.

*FactSet, DJIA, Aug. 4, 2022

  • Despite the big rally yesterday, breadth was quite low (less than 70% of companies were up)
  • Just as much as I hold on to the thesis that the 10-year bond is telling you of disinflationary pressures further out, the message of the 2-year bond has to be told as well …  With yields now persistent above 3% on the two-year (closing at 3.02% today), and with the yield curve now inverted by a shocking 36 basis points, the bond market is absolutely predicting a recession and absolutely believing the Fed will tighten too much in the short term.
  • The ten-year bond yield closed today at 2.66%, down nine basis points on the day
  • Top-performing sector for the day: Consumer Discretionary (+0.54%)
  • Bottom-performing sector for the day: Energy (-3.60%)

Top News Stories

  • The Senate voted to accept the treaty bringing Sweden and Finland into NATO by a vote of 95-1
  • In an utterly tragic car accident, the delightful Congresswoman of Indiana, Jackie Walorski, and two staffers died yesterday.  Praying for comfort for her family.

Public Policy

  • Indications are that Senator Sinema is, in fact, calling for changes to the Manchin-Schumer Reconciliation Bill.  As of my press time, all that has been circulated is that she wants to:
    • Cut out the carried interest changes they proposed
    • Add $5 billion of funding for drought relief
    • Make some changes to the 15% corporate minimum tax deal (whether it is taking it out altogether or modifying it)
  • I am watching all of this as closely as one can
  • Then, on the other side of things, the Senate Parliamentarian could very well rule that the following things have to go (as not eligible under the rules of budget reconciliation):
    • Capping out-of-pocket costs for insulin
    • Penalizing companies for raising prices
    • Forcing electric car tax credits to be within the confines of American-made products
    • Forcing 2 million acres of land to be auctioned for oil and gas before the same can be used for solar and wind
  • NOTE – at play is NOT whether the above four things are “good policies” or not; the parliamentarian has no say in lawmaking or deal-making in our country.  Rather, at play is whether or not those components fit within the criteria for a budget reconciliation bill, which has tight criteria because of its ability to go to vote with only a 50-vote majority (bypassing filibuster)

Economic Front

  • Initial jobless claims came in at 260,000, right in line with expectations.  A very low pace of firing that is slowly increasing …
  • The trade deficit came in at $79.6 billion for June.  Exports were up by $4.3 billion, led by natural gas, and imports were down by $1 billion (less autos, and I have to think less than there would have been from China).
  • I can’t emphasize enough how much previously built-up inventories due to supply chain concerns have impacted the GDP print (will elaborate in Dividend Cafe tomorrow).

Federal Reserve

  • The Bank of England increased its interest rate by 50 basis points (largest hike since 1995), bringing its rate to 1.75%
  • The Fed has been “tightening” their balance sheet by $47.5 billion per month the last few months (that is, not reinvesting matured proceeds from the bonds they owned, effectively allowing the roll-off to mean fewer assets on the balance sheet – a form of taking money out of banking excess reserves).  That number goes up to $95 billion per month in September.  I have thought for some time that the point at which the Fed gets squeezed in their policy tightening is when QT forces credit spreads to a wide enough level that the Fed can’t take it anymore.  We shall see if and when that happens.

Oil and Energy

  • WTI Crude closed at $88.32, down -2.60%
  • As Crude Oil has dropped a great deal recently (below $90 today), Natural Gas has been extremely resilient (still above $8)
  • Iran nuclear talks, this time spear-headed by Europe, are supposed to kick off today, but the U.S. is not optimistic they will go anywhere.
  • Gas prices have fallen for 50 straight days

Against Doomsdayism

  • There are a lot of jokes about the pop culture reference to the cell phone shown in the movie Wall Street, but the truth is that a 2-pound phone that took 10 hours to charge and died after less than 30 minutes at a cost of $10,000 (in today’s dollars; $4,000 then), was considered a really amazing and awesome thing!  Only 2% of Americans owned cell phones even into the early 1990s.  Right now, over 80% of sub-Saharan Africa owns cell phones.  Think about that?  Now, can I say that social media on our cell phones is an antidote to doomsday?  Not really, but let’s do one conversation at a time here.

Ask David

“What are your thoughts on selling options? It generates cash flow, potentially more than a dividend. It gives you a way to buy or sell stock at a predetermined price in the future.”

~ Scott

A basic principle of all economics is that there is no such thing as a free lunch.  This topic is not about whether or not selling options can generate income – but rather the trade-off in doing so makes it worthwhile.  Having spent many years exhaustively studying this, I am quite convinced it does not.

When one “sells a put,” the seller could very easily be forced to buy shares at a strike price higher than the stock price itself.  That risk can be much higher than the premium collected, and unlike a normal long stock position, this is locked into the time period of the contract.

But when one “sells a call” – and we are assuming here they own the underlying stock so are not “naked” – there is no way around the fact that the income is as attractive as the risk of getting stock called may be (based on where you set the strike price).  There are two types of stocks in the world: Those I want to own and those I do not.  The idea of clipping a couple of percent in income to potentially have to lose the stock I want to own is incomprehensible to me. And then losing the upside of what the stock does above the strike price makes no sense to me (why would I want to own a stock that I didn’t believe was going higher?).  It becomes a vehicle of market timing or at least incurs the risk of market timing, period.

I always find it helpful with financial instrumentation to make a comparison to something else in our lives.  Just as when thinking about variable life insurance, I always wondered why people wouldn’t also want to attach a mutual fund portfolio to their dental insurance if it were such a good idea. With writing calls, I wonder who all would like to have certain prices set at which one could lose their house, or their car, or some other asset they care about less than that, in exchange for a tiny flow of income.  We don’t make a market in such things because the idea is silly.  Now, in call-writing, you are playing counterparty to a risk taker and getting paid for it.  Great.  But the capital required is better put to use in a long, timeless, devoid of an expiration date, dividend growth portfolio.

On Deck

  • Dividend Cafe tomorrow is all about the “recession” and the state of the economy
  • This Monday, August 8, my new (free) Economics 101 course goes live.  It was designed for upperclassmen high school students but is an exhaustive introductory primer for all interested.  And yes, it is very consciously faith-based (as it should be).
  • Jobs Report tomorrow!

Have a wonderful night, and reach out with any questions!

With regards,

David L. Bahnsen
Chief Investment Officer, Managing Partner
dbahnsen@thebahnsengroup.com

The Bahnsen Group
www.thebahnsengroup.com

The DC Today 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

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

He is the author of the books, Crisis of Responsibility: Our Cultural Addiction to Blame and How You Can Cure It (Post Hill Press), The Case for Dividend Growth: Investing in a Post-Crisis World (Post Hill Press) and his latest, Elizabeth Warren: How Her Presidency Would Destroy the Middle Class and the American Dream (2020).