Dear Valued Clients and Friends –
So the market went up again today, went negative in the middle of the day, then rallied back in the second half of the day (see chart below). The FDIC is looking to move the cost of the recent bank failures to the banks that didn’t fail (read: to their customers), Sen. Joe Manchin has decided he regrets his support of the “Inflation Reduction Act” atrocity, I wrote of extraordinary bond market volatility two days ago, and then we went two days in a row with bonds frozen in time, and Dr. Anthony Fauci has himself a speaking gig (not sure if it will be virtual or not?).
I am writing this from Washington D.C. where I spoke at a summit this afternoon and where some tendency to read everything through a political lens is intensified. It always feels a little dirty, to be honest. But it is a gorgeous day and certainly a gorgeous time of the year, and my two recommendations for anyone visiting our nation’s capital are: (1) Come in the spring, and (2) Don’t come as a lobbyist, bureaucrat, or general political crony. Enough said.
I remain convinced that the key issue adding to profitability in the energy sector going forward is constrained supply, much of which is a decision and some of which is circumstantially forced. Sen. Manchin’s op-ed mentioned above may reflect a sitting U.S. Senator shocked – shocked! – to discover that many do not want to facilitate U.S. energy independence, but it is not a shock at all. And what it does is make the sector even more attractive as it pertains to legacy and incumbent assets, pipelines, and producers. The sector is capital constrained, which boosts expected rates of return for the capital that comes in. It is supply constrained, which boosts prices and margins for the supply that comes online. And it is sentiment constrained, which boosts risk premium around as a contrarian reality. It will ebb and flow, no doubt, but what the opponents of our U.S. energy sector never understand is that all the bad things are actually good things for investors.
*CNBC, DJIA, March 30, 2023
Dow: +141 points (+0.43%)
10-Year Treasury Yield: 3.55% (+/- basis points)
Top-performing sector: Real Estate (+1.22%)
Bottom-performing sector: Financials (-0.29%)
WTI Crude Oil: $74.38/barrel (+1.93%)
“Do the three ‘crypto’ bank closures reduce the potential supply of credit to, and therefore supply of, crypto currencies, thereby ‘explaining’ the recent crypto price rallies?”
No. The one correlation that has been impenetrable for years now is that crypto rallies with speculation and falls without it. Nasdaq, tech, leverage, and such are the “beta” of crypto. The LACK of credit to crypto for LEVERAGED crypto purchases added to its bloodbath late last year, but there is no change in the supply of crypto up or down when leverage is there or not there; it is a mirage. Crypto has gone up this year with other speculation and may go up further, or down further, as any valueless speculative exercise may go – that is, at the discretion of its speculators.
“Do you consider dividend growth investing more of a way for an investor to play offense or to play defense”
Yes. Investing for cash flow growth is the best offense/defense blend I am aware of for a risk-taker. Portfolio hedges will play defense but zap offense. Using leverage or pursuing speculative growth or market timing or multiple expansion will play offense but lack defense. We are looking for fundamental strength in the balance sheet, Free Cash Flow growth, and a defensible business model, which is the best defense there is. But that high single-digit FCF growth resulting in a high single-digit total return between yield and re-pricing is a textbook offense as well, and not offsides to what investors can expect these well-run companies to deliver.
Send questions any time, and have a great night!
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
The DC Today features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet.