JotCast | 1/31/23 Capitalist Times Live Chat

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1/31/23 Capitalist Times Live Chat

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Roger Conrad

5:16

Thank you for joining us today.

Guest

5:17

Elliott, Further to your reply above, I own SLB and have for 18 months, same goes for BHI and HAL, although you told me not to buy HAL. What wrong with owning FTI and NOV at the same time?? We both knew deep water and sub sea would heat up. You refuse to realize that much of the appreciation in stocks like FTI and NOV occurs during the anticipation phase. By the time the anticipation becomes reality, it is too late. Things are coming together for NOV now, as we knew they would, and the stock has more than doubled in value.

Elliott Gue

5:17

There's nothing wrong with owning a stock like FTI or NOV alongside the other recos. However, the purpose of the Actively managed model portfolio is to offer our top recommendations across various energy sub-sectors (upstream, big oils, refiners, MLPs/midstream, services, etc.). So, generally we look to recommend a few names from each group that (we believe) offer the best upside potential and the best risk/reward potential. I have no problem with FTI/NOV and, as I've mentioned in the past, FTI is a name we've considered adding. However, in the model portfolio we have to narrow down our exposure to just a few of our top names with leverage to the best growth trends in each sector -- in this case, we've generated superior returns with those recommendations. In some cases, we explicitly state we prefer one name to another -- for example, SLB to HAL because we believe int'l offers better upside (SLB has performed better than HAL).

Elliott Gue

5:17

Of course, we do recognize that markets discount the future not the present. Ever since this cycle bottomed in 2020, while the consensus on Wall Street was peddling vacuous group-think about the end of oil, the sustainability of XOM's dividends, and lower for longer prices, we've been doing just that. We certainly wouldn't have recommended a name like PXD or EOG in early December 2020 based on their near-term prospects. We've been trying to look ahead to what's actually likely to happen with oil/gas prices and the names that are best placed to benefit. No, we haven't added every one of the best stocks to the portfolio but the ones we have added, on the whole, have outperformed and by a sizable margin.

Fred W.

5:19

Hi Guys,
One more quick question.
Since you both foresee a relatively strong oil market over the next few years, how would you suggest I allocate the bulk of my portfolio (percentage wise), between the different portions of the oil market, ie, Pipelines, Oil majors, Natural gas, Refiners, etc?

Thanks again for the great service and advice that you both provide.

Roger Conrad

5:19

Hi Fred. Thank you for those kind words.

It's probably time for us to revisit the cycle again--and how it works regarding returns on various subsectors. But the best way to answer you questions now is to suggest you take a look at our Energy and Income model portfolio, which not only has recommended stocks but also advises how much of each to own. We also have a cash component to the portfolio now, which reflects our view that prices could soften a bit in the near term--if our forecast for a recession and resumption of the stock market slide comes to pass.

jeff B

5:22

Do you have an opinion on Coterra?

Roger Conrad

5:22

It's currently rated a buy at 22 or lower--tracked in our Exploration & Production coverage universe, which you can access on the EIA website. The stock pays a variable dividend that's been all over the map recently, mostly to the positive but could go lower this year due to the drop in gas prices.

Victor

5:30

Elliott, you have indicated that you expect that we’ll enter into a recession this year. Whirpool provided positive guidance on their earnings call. I was expecting the opposite. It seems that consumers are still spending money. When you look at the COMPQX, it’s making higher highs, in contrast to what we saw only a few months ago. Similar situation with the SP-500. Are you still thinking that we’ll enter a recession and that we’ll see the SP-500 below 3500? Your thoughts. Thank you.

Elliott Gue

5:30

Yes, I still expect a recession. Earlier on in this chat, I mentioned an unusual quirk in this cycle, whcih is that the market peaked more than a year before we got a recession (That's not happened like this the 1940s). I think the reason is that over the past year, the market has been grappling with the rise in interest rates but hasn't yet really priced in the likely earnings hit; historically, the earnings recession is what powers the second leg of the bear market and a drive to new lows. I must confess, I haven't really looked through WHR's call yet; however, most of the stocks that have beaten so far this quarter are basically beating a low bar of expectations after months of steady downward revisions to estimates.

Elliott Gue

5:30

One more point I'd like to mention is that we are seeing something of a stealth bull market underway, the mirror image of 2021. Basically, many NYSE stocks bottomed back in October and the average stock is up significantly since time -- since the 10/12/2022 closing low, the S&P 500 is up 14.5% but the S&P Equal Weight is up 17.1%. While this is an encouraging sign broadly, it doesn't mean the market has bottomed -- breadth improved through most of the 2000-02 bear market even though the averages continued to fall, weighed down by heavily-weighted large cap components. In this case, the stocks that are performing well are more cyclical and the laggards are tech -- I suspect this reflects the fact the market is still focused on interest rates (hurts tech) and has yet to grapple with a likely recession.

Roger Conrad

5:33

Q. Roger: Hope all is well with you. Two questions for the upcoming chat: Do you think the weather related damage to the PG&E (NYSE: PCG) system is sufficient to delay the onset of a dividend-whenever that might have been planned? Do you have advice on positioning one's portfolio to best weather the possibility of a government shutdown and the associated potential damage to the markets?--James C.

A. Hi James. The key issue here so far as weather for PG&E has been wildfires. And mid-month, the company reached a $24 mil settlement over claims from the Dixie Fire, which despite the state of California finding fault is not a big hit and should cap the total damages within the amounts covered by wildfire insurance. It’s never great to be at fault or to have to pay out damages, which in this case amount to around $1.15 bil. But compared to the previous decade’s damages,

, this is solid progress and a good sign that grid investment has been put to good use. And I don’t believe anything coming out of recent weather is significant enough to derail recovery plans, including eventually resumption of the dividend.

As for how to weather the possibility of a government shutdown, such an event would almost certainly be very negative for growth. The last time this happened, we saw payments to government contractors interrupted, for example. Treasurys ironically strengthened, because the assumption was Washington would not permanently default and that bonds would be safer than stocks in a resulting recession.

My view is the government will find a way to avoid default. But the best way to prepare for such an utterly idiotic and preventable outcome as an investor would be to do what we’re doing now—prepare for a further market decline and potential recession by hardening your portfolio and raising a little cash.

guest

5:36

Regard the oil super cycle: We know oil is a component in so many products we use and depend on so a certain level of demand will be there regardless of the EV situation. This continuous demand for oil certainly played a part in driving up prices and inflation. This brought J Powell onto the scene with higher interest rates to lower demand for products and lower employment which, if successful, will further lower demand for products and oil. When Powell pivots it seem employment, oil and misc product demand will rise until Powell comes back on the scene. Simply a circle of demand and demand destruction. How does a super cycle work into this scenario without some event such as war or OPEC activity?

Elliott Gue

5:36

Generally, commodity cycles are driven by both supply and demand but supercycles tend to be dominated by supply. The reason for that is that demand can change quickly and doo to the normal economic/business cycle. It can change on a proverbial dime while supply can't -- it takes years to bring significant new production onstream. The Fed can't control supply, only (kind of) demand. So, much like the 70's-early 80s, prices can come down temporarily when the economy softens but they tend to surge right back once the economy recovers. The only real "cure" for a supercycle is a significant expansion in supply -- in the late 70's early 80's it was Mexico, Alaska, the North Sea, etc. That's what truly killed oil price inflation more so than Paul Volcker. This supply cycle will see setbacks, but it won't end until there's a wave of investment that improves the supply picture.

Victor

5:42

Elliott, how do you feel about HAL at these levels? What is the outlook on this one. How much more upside do you see? Also what’s your opinion on CTRA and RRC?

Elliott Gue

5:42

I think HAL is OK, but I prefer SLB. The reason is that the biggest growth in services spending is coming from places like the Middle East and Latin America, where SLB has a superior market position. Both CTRA and RRC are primarily natgas plays -- I think both are OK longer term but we still prefer CHK and, in particular, it's exposure to the Haynesville Shale near key Gulf Coast demand centers.

Roger Conrad

5:45

Q. To begin, thank you for ongoing guidance & extra effort, including these live chats. How do you feel about the timing for investing in fixed income (such as a layered Bond portfolio or Preferred Stocks)? I would greatly appreciate you thoughts on this.--Harvey F.

A. Hi Harvey. It’s our pleasure. Thank you for your questions. Basically, I don’t see a lot in fixed income that’s attractive right now. Most of the short term bonds I highlighted in the December issue of Conrad’s Utility Investor, for example, have rallied to levels where yields to maturity are 1-2 percentage points lower than where I recommended them. I would suggest looking at the list and seeing what your broker can locate.

Victor

5:45

Hello guys and thank you for this service. Elliott, what is your outlook on oil prices when you consider that China comes back online and the SPR releases are ended? Inventories are down as is production and daily demand for crude oil worldwide is expected to increase in the next 3 years.

Elliott Gue

5:45

Thanks for the question. Both and end to SPR releases and China demand are positives as is the fact I see OPEC willing and able to provide price support around $70/bbl through further production cuts if needed. However, the weakening economic cycle is a headwind -- we still see oil prices averaging in the $80/bbl area this year. I'd say the risks are skewed to the upside (higher oil prices), particularly in the first half of 2023.

Roger Conrad

5:46

One more note to Harvey-- At this point, I think we’re best off with money market instruments—which yield as much or more than bonds of similar risk and aren’t at risk to persistent inflation and a Federal Reserve determined to corral it. We’re also better off with money funds in a recession, since much shorter maturities mean they don’t carry the same credit risk as bonds.

The day will come again when bonds are attractive both for yield and risk. But neither is the case at this time and the best course is to keep our powder dry.

Dudley

5:53

D has a product called Dominion Energy Reliability. Kind of like a money market. Currently pays 4.5%. No withdrawal restrictions. Please provide your thoughts. Thanks

Roger Conrad

5:53

Hi Dudley. I haven't looked at that one. As I've said, I think Dominion Energy's ongoing strategic review will involve asset sales that should allow the company to significantly reduce debt without too much of an impact on earnings and ability to grow dividends. And I continue to like the common stock long-term, so I'm comfortable with the credit risk of DERI--which oddly enough looks like a relatively low cost way for Dominion to raise capital. Generally speaking, though, I would prefer a money market fund with a greater variety of security issuers.

Roger Conrad

5:55

Well that appears to be all we have in the queue today, as well as from what we received prior to the chat. Once again thanks to everyone who participated today. As always, you've given us a lot of food for thought. If for some reason you feel your question was not fully answered, please drop us a line at service@capitalisttimes.com and we will get back to you as soon as we can.

5:57

We will be sending out a link to the complete Q&A to all of our Capitalist Times members, and it will also be posted to our various websites.

Tommy L

5:57

Thank you for today's web chat. Always great insight!

Roger Conrad

5:57

Thank you Tommy.

Roger Conrad

5:57

Have a great evening everyone!

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