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10/27/22 Capitalist Times Live Chat
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AvatarElliott Gue
2:36
Q: Congrats on predicting both the summer rally and the fall return to lows in the S&P 500. My understanding of your current forecast is an intermediate "target" of 3100 and farther out an ultimate bear market low which could be much lower that that.  Somewhere in there one or more bear market rallies are likely to happen.

A: Thank you for the kind comments about our forecasts for the market over the summer. Your characterization of my current outlook is correct. 3,000 to 3,100 would constitute the average decline for the S&P 500 in a bear market (based on all bear market declines since the late 1930s). The same region also represents the top of the late 2019-early 2020 trading range (an obvious technical support level on the charts).
2:37
So, I think that’s a good starting point for an S&P target. The problem is that the market is still very expensive on just about any historic yardstick and the current inflation problem is the worst since the 1970s. Also, my research suggests the sell-off in the market so far is entirely a function of rising rates (which shrink P/E multiples), so in my view the market has yet to price in a likely US recession.
So, I think the risks are to the downside – an eventual retest of the 2,500 region on the S&P 500 is quite possible.
Every bear market in history that lasts as long as the current downtrend features multiple bear market rallies, so I believe that we are likely to see at least one more bear market rally of 10% plus before the ultimate low for the S&P 500.
Question #1 - Do you think we are at the start of a bear market rally now? If so, how high would you anticipate it to go before turning back down?
A: Yes, I do think we’re in the early stages of a bear market rally right now. There are three main drivers: 1. Very poor sentiment toward the stock market. While tough to measure, I think the BofA Global Fund Managers survey and the Commitment of Traders data from CFTC are enough to suggest that there’s a significant amount of institutional money sitting on the sidelines and prepared for further market declines. It’s tough for a major sell-off to start when that’s the case. Note, however, that this does not mean the bear market is over – sentiment towards stocks was very negative in the Spring of 2001 and the autumn of 2008 but stocks went on to make significant new lows. 2. I think yields have likely peaked – yields on the 10-Year Treasury and 20+ years specifically – and the Fed will kind of “pivot” in thatit’s likely to slow the pace of hikes in December and pr
probably pause next year. Note: this is actually very, very bad news for stocks over the intermediate term because it means a recession has likely already underway, but it can be enough to prompt a bear market rally given how many investors are positioned for a pivot. 3. Some of my short-term indicators are registering buy signals. For example, market breadth got very oversold in late September and has now improved, which usually means more upside ahead.
It's impossible to know how high stocks can go in a bear market rally, but the two targets I’m watching are 4,100 on the S&P 500 (200-day MA) and 4,300 the August highs. I think the S&P 500 is more likely to peak toward the bottom of that range.
2:38
Question #2 - I'm writing this on 10/20/2022 and so far it seems Wall Street thinks the earnings reports that are coming in are OK - at least not so bad as to trigger the coming reevaluation that you explained in Creating Wealth. Does this change your market forecast?
A: No, it doesn’t change my forecast. Some stocks that reported early weren’t quite as bad as some feared – NFLX and JPM are two examples – but overall results have been poor. At the time of this writing, only 56% of S&P 500 companies have beaten revenue estimates and less than 72% have beaten on the earnings line. This compares to 63.5% and 75% last quarter respectively. The average stock is down about 0.55% in the day after its earnings release compared to a small gain last quarter.
The aggregate earnings and sales surprise for the S&P 500 is the smallest since early 2020.
And, the biggest shift isn’t current earnings, but the outlook – I think you’ll see published earnings and revenue estimates for the S&P 500 continue to fall for Q4 2022
2022 through Q3 2023 as we move through earnings season.
Question #3 - I have another investment advisor ( who has been totally wrong so far about this bear market) who thinks a turnaround (new bull market) could be right around the corner. They view this bear market as a lot like the 1966 and 1982 bear markets. Can you explain why that view is wrong?
A: 1966 is one of the rare soft landings for the US economy – the S&P 500 endured a minimal bear market, falling about 22.2% but the economy didn’t enter recession. The Fed was able to ease in 1966 because inflation peaked at 3.8% and fell back to around 2.5% in early 1967. I think the probability of a US recession by mid- 2023 is more than 90% and the scale of the inflation problem is much worse today than in 1966.
The market peaked in 1980 and fell 27.1% to its late 1982 lows. There was also a double-dip recession at this time. However, I’d note that this episode ocurred only after a near 15 year “bear market” that started in the late 1960s characterized by negative real returns from stocks. The stock market was already very cheap by 1980 and had a lot of bad news priced in – valuations, particularly for growth stocks, had been falling since the late 1960s.
I think the 1973-74 bear market – the beginning of the Great Inflation period that ended in 1982 – is a closer analog.
Mike C.
2:42
First, the redesigned web site and EIA newsletter look awesome! And the continued, steady, rock solid guidance and insight look awesome too - I very much appreciate everyone’s work at CT over the years. 

A few questions:

Your thoughts on the recent Bloomberg Businessweek piece on brain drain at XOM…any risk of impact to performance?

Thoughts on using bear lows to buy slightly OTM cheap LEAPs on conservative firms below dream prices, like VZ?

Finally, do you see a moment ahead in the next couple of months where - between any year-end/bear market rally and the charade of SPR-release “price support” ending - where you’d recommend taking profits on energy names?

Thanks again for all of your excellent services!
AvatarRoger Conrad
2:42
Thanks Mike! Starting with ExxonMobil, this is a company with a very deep bench and deep pockets to pay executives. So I would not worry too much about any brain drain--especially since this company can rely on the brawn of an AA- credit rating and $56 bil in projected 2022 free cash flow.

My only reservation about using LEAPs to buy what as you point our are very cheap high quality stocks like Verizon (7.2X expected next 12 months earnings) is it can take time for negative sentiment extremes to turn. The common also carries a growing 7% plus yield.

Finally, regarding taking profits later this year, we would view that as a short-term strategy at best--as we did giving that advice for some producers earlier this year. Our view is this energy super cycle has a long way to run as investment/supply fall further behind underlying demand growth. We're interested in building positions to capitalize.
Guest
2:45
Thanks for holding these chats. Very useful! I understand the longer term thesis on Oil related stocks but also concerned about the "sell everything" moment that Eliot talked about in recent emails. Several of your recommended integrated oils and refiners are above their "buy under" prices - does that make them candidates for profit taking in the near term?  Specifically interested in XOM, VLO. Perhaps buy them back during the probable recession coming soon?
AvatarElliott Gue
2:45
Thanks for attending the chats. We do not recommend adding to positions in recommended names that are above our buy under targets; however, we don't think it's time to take profits on names like XOM and VLO either. In yesterday's EIA we wrote about why we believe the energy sector can outperform the broader market through the coming bear market and then see much stronger gains into the next bull market. Basically, we think the dip in energy stocks in the current bear market will be much shallower than for the market as a whole. It's also quite possible -- even likely -- that some energy stocks have already seen their cycle lows for the current bear market. Often, during bear markets, emerging leadership groups bottom before the S&P 500 and go one to outperform the broader market by more than 100 percentage points in the ensuing bull market. I think that could be the case with energy. If we do get some additional panicky sell-offs in energy, driven largely by broader market volatility, we see that as an
AvatarElliott Gue
2:45
opportunity to buy our favored names at discoutn4ed prices.
Buddy
2:55
Roger, VZ laid a big egg this quarter.  There is no way to look at it and not conclude it was a huge disappointment.  What is your take?
AvatarRoger Conrad
2:55
Hey Buddy. I'm not sure I would agree with that assessment. It's clear that Verizon's wireless subscriber numbers disappointed some investors and that was picked up on in the financial media. But they did actually have a net increase, which was a reversal from the big disappointment in Q2. Also fiber broadband ads accelerated and the company announced 48% of its cell sites are now connected with its own fiber, a move that will help reach the new goal of $2 to $3 bil in annual cost cuts. ARPA was higher and wireless sales growth seemed to accelerate back to initial guidance. Cash flow and debt reduction also stayed pretty much on track and management affirmed 2022 guidance there as well. I think the real promise of this company is on the enterprise/industrial side, which is where counterparts in China and Japan have been able to monetize 5G so far. That's because the applications an advanced network like VZ provides can cut costs at businesses, whereas they represent an additional cost to consumers.
AvatarRoger Conrad
2:56
Continuing on VZ, there aren't many companies trading for 7X or so expected next 12 months earnings with a growing dividend north of 7% that are actually growing revenue. So while I'm disappointed in the share price performance--as well as that of pretty much every other telecom this year-- intend to stick with the position.
Jeffrey H
3:05
Dear Roger/Elliot, I have four questions. I hope you have the patience to answer them.

First, I have shied away from Black Stone Minerals because I don't want to deal with K-! filing. But I am interested in VOC Energy Trust (VOC), which seems to be in more or less the same business. Are you familiar with the company? -- high dividend, large capital-gains recently (yes, it is approaching the ex-dividend date). If you do know the company, do you see specific issues with it, apart from its micro-cap size and variable payout?

My next question concerns Innergex (INGXF). The stock has gotten clobbered lately. Are the problems similar to those experienced by some other Canadian renewable energy companies -investment in Chile, the drop in the Loonie, variable wind/water levels, high interest rates? Or are there additional company-specific issues? How important is the Hydro Quebec support for the company? Are CAPEX and dividend safe?

My third question strays from energy, but I hope you will field it. A while ago I
AvatarRoger Conrad
3:05
Hi Jeffrey. VOC Energy Trust isn't one we currently track. It's a vehicle for its sponsor to hold properties in Kansas and Texas--and they pay a dividend based on the realized selling price of what's produced on those lands. There are two key differences with Black Stone. First, VOC is basically all oil while Black Stone is heavily natural gas. That made a difference in the calendar Q4 dividend, which BSM increased while VOC cut. The other is BSM is a small but still potential royalty trust with $3.7 bil plus in market cap while VOC has only $165 mil and is heavily owned and controlled by VOC Partners. That would likely be my biggest issue owning it over a larger player--too many examples where the interest of the primary owner did not match up with ordinary shareholders.

Innergex will report Q3 earnings November 7. Shares have declined sharply since the Sept 28 announcement it would buy out partners in its French wind portfolio--which raised questions about financing in a rising rate environment.
Jack A
3:09
Hi Elliot:
Thank you for your help during this volatile market. 
I have several questions: 1. In the past, you have relied a lot on the PMI reading.... The recent PMI was down to about 47, which indicates a contraction in the economy.. .. Has that changed your prediction going forward?....... Do you feel the Fed will be less aggressive raising interest rates, and thus the market may not undergo as deep a contraction as you expected? 2. KMI came out with their earnings, and the stock price took a hit.... What was behind it, and have you changed your thoughts about KMI?...... 3. In the last chat I asked if you thought the price of exploration and production oil companies would reach the highs achieved in early June, and you correctly predicted "yes" - and they have recently reached new highs. You were quite bullish on the price of oil companies going forward.... How high do you expect them to go, and what is this prediction based upon?.
Thanks
AvatarElliott Gue
3:09
Thanks for the questions and for attending the chat. The ISM PMI Index for last month was 50.9 while the New Orders component (which tends to lead the headline) was at 47.1. I suspect we'll see the headline under 50 in the next month or two. This is consistent with my forecast for the US economy to slip into recession by early 2023. I also watch the Conference Board's Leading Economic Index (LEI), which began to signal recession in May-June -- usually recessions begin with 6 to 12 months of such a signal. So, no change to my view -- I don't think we're in recession yet, but I'd peg the probability of recession by early 2023 at 90%+.
AvatarElliott Gue
3:09
My guess is that the Fed will hike 75 basis points next week and then dial back to 50 basis points by December and make 25 basis points in early 2023. I also think that as the economy slows, you will see some of the inflation numbers cool off, though they’re likely to remain well above the 2% Fed target. I also continue to believe a Fed cut is possible at some point next year in the context of a deepening recession. 
However, the key point to remember is that Fed “pivots” are not bullish for the stock market. Typically, the Fed only pivots after the US enters recession (or is on the brink of recession). In a normal cycle, the bulk of the losses in a bear market occur only AFTER the Fed “pivots.” My targets for the market are unchanged though I tend to believe its likely we’re now in the early stages of another bear market rally as I mentioned earlier in the chat.
3:10
I suspect this bear market rally will be tradable (if you’re a shorter term trader) but for longer term investors will mainly be an opportunity to lighten up on vulnerable groups.
We still like KMI. I think Roger wrote about it earlier in today’s chat at some length and I’d second those comments. To that I’d add that the initial selling pressure in KMI appears to have reversed and the stock is actually back above its pre-earnings trading range.
In the short-run, the price action in oil producers is likely to be driven by the broader market and macro trends. Generally, I would be surprised if we did not see some sell-offs in energy stocks going forward but I also believe it’s quite possible (even likely) some names have bottomed for this cycle. I’d expect any pullback in energy to be shallower than the broader market.  Over the longer-term, I think you could see gains of 100% to 200% from current levels for many energy stocks. By longer term I mean the next bull cycle for the S&P 500 –
– let’s call it 3 to 5 years. That forecast is based on 3 primary elements: 1. A likely oil/gas and commodity supercycle driven by supply shortfalls following several years of underinvestment in new production capacity. 2. Low valuations for energy stocks relative to any historic norms and to the stock market as a whole. 3. The pattern we saw coming out of the last big downcycle for energy back in 2002-03 up to the 2008 peak.
AvatarRoger Conrad
3:14
Continuing with Innergex, I believe the company will manage this financing risk with the financial support of 19.82% owner Hydro Quebec. Other than that, the portfolio appears to be performing well, though we'll get a better read with the numbers. I think you have to chalk up a lot of Innergex' decline to the pummeling of the overall stock market this fall. The US dollar price of the stock has dropped a bit more with the decline in the Canadian dollar. I still believe the currency will ultimately be a plus. By the way, Chile exposure is also likely to be a positive long term as that country adopts a more moderate constitution than the just defeated left-leaning one.
Ben F.
3:19
Thank you for holding these live chats.

Thoughts on Verizon?
AvatarRoger Conrad
3:19
Thanks Ben. I think Verizon is a dominant company in a still growing business trading at a deep bear market valuation because of some very visible near-term headwinds. The biggest problem all telecoms are facing now is the consumer is generally not willing to pay more for 5G service and applications. That resembles the rollout of 3G and is a contrast to the massive adoption of 4G. But as we've seen in China and now Japan, 5G uptake has been very strong in the enterprise/industrial space--where applications can dramatically boost efficiency and cut costs with opportunities for automation and remote operation. Verizon has the best network in the US for that by far and is starting to pick up business--and it's still greatly outspending rivals in CAPEX which is widening the lead. That's the reason to own the stock, with the 7% plus yield paying us to be patient.
Buddy
3:22
Elliott,  SLB and HAL had stellar quarters, yet BKR continues to lag.  Is the stock worth holding?  In the past, it has alway been a serial under performer.
AvatarElliott Gue
3:22
Of the three names you mention, SLB had the best quarter in my view, but BKR was a close second. Indeed, shares in BKR jumped more than 6% following its quarter behind SLB's 10%+ gain but ahead of HAL's 1.2% or so. Last quarter BKR missed mainly due to the wind down of its Russian business and I think that the rally following its last quarter was a sigh of relief due to the fact that the report was solid (they beat and affirmed projections for 2023).  I also think it's notable that they managed to beat despite a pretty big headwind from a weak euro. Going forward, my view is that the dollar should weaken a bit (or at least stabilize) as the Fed slows the pace of rate increases. That removes a headwind and the outlook for LNG project investment decisions in to 2023 remains very solid. Bottom line, I continue to like SLB for its international exposure (where I think the cycle will be strongest), BKR for its LNG leverage. I think HAL is OK but I don't see it doing as well through the next cycle as SLB because of
AvatarElliott Gue
3:22
its greater focus on North America.
Buddy
3:26
Elliott,  The oil service sector is finally heating up big time as pointed out yesterday in the WSJ. It is an under-owned sector. Is it too early for sub-sea?  What is your latest take on FTI?  Thanks.
AvatarElliott Gue
3:26
Generally, in an energy cycle the upstream names benefit most and then the services stocks heat up as the cycle matures. I think we're reaching that stage of the cycle -- usually 1 to 2 years in -- where services start to perform as well as upstream. SLB noted that offshore spending/activity are beginning to perk up and I think ultimately names like FTI will benefit. AT this time, however, I prefer SLB to benefit from the upturn on offshore deep-water spend
Phil B
3:27
Dear Roger & Elliott,

Could you please give us your latest views on GasLog Partners (GLOP). Their latest results look strong and they have reinstated their dividend (albeit at a minimal level). We hear that a significant number of natural gas carriers are being used for offshore storage near European ports as onshore storage facilities are already full. The stock’s price has more than doubled this year. Is there more upside to come? Many thanks for your excellent advice over the years.
AvatarRoger Conrad
3:27
Hi Phil. The challenge in the tankers space has been and remains a glut of supply. And in the LNG sector, that's only going to change very slowly given the time needed to site, permit and build new liquefaction capacity. I would agree that some aspects of GasLog Partners' earnings were positive, though others appear more related to volatile factors like the EUR/USD exchange rate. G&A costs were actually higher as were financial costs (up 42.5%) due to the partnership's heavy reliance on variable rate debt. And looking ahead, there's the impact of a major asset sale to cut debt, as well as reliance on spot market. Finally, there's the issue that this company has a 29.66% owner and general partner in Gaslog Ltd--whose interests may or may not align with those of ordinary unitholders. Bottom line is these results seem to indicate Gaslog is through the worst of this cycle and will survive. But stiff challenges remains and we still don't see a whole lot to attract investors.
Guest
3:32
Elliott:  Please give us your definition of recession as the standard measurements often cited do not seem to apply.  Thanks
AvatarElliott Gue
3:32
I favor the basic definition used by the National Bureau of Economic Research (NBER) of recession as a significant decline in economic activity that is spread across the economy and lasts more than a few months. While that's a bit vague, in practice I like to look at the Conference Board's Leading Economic Index (LEI) as a proxy -- a recession occurs when you see widespread weakness in LEI components tracking various aspects of the economy from the labor market, consumer confidence, housing, credit markets and manufacturing.  I actually think GDP is a terrible way to define recessions, especially
AvatarElliott Gue
3:32
the often cited 2 quarters of negative GDP growth. The reason is that GDP can be skewed by factors such an inventories and trade.
Jimmy C.
3:34
Good morning, Roger: Very surprised by the strength in the rally over the past few days. Was really expecting more dream prices to be available and thinking the new FED rate increases will bring this to fruition.   Also would like to ask about utility preferreds such as SOJD, GPJA. ELC, ENJ, etc., some now paying over a 6% yield. When
these revert to their par value they will provide good gains and a good yield along the way. Your thoughts, please?
AvatarRoger Conrad
3:34
Hi Jimmy. I think we have to be patient with anything we buy at this point. Utilities as a sector have been strong this year for several reasons--reshoring of capital and manufacturing, proven recession resilience, attractive yields, unprecedented federal support with tax credits, ability to pass on costs from inflation etc. And all of these are strong as ever. That means buyers will come back when the stock market settles and damage should be less to the end of what's become a bear market in my view. But as we've seen since the high of mid-September, they're not immune from broad market selloffs. And with the risk of a recession rising, it seems unlikely we've seen the final lows for this downturn--and highly likely more stocks will hit Dream Buy prices. As for preferred stocks, I'm looking--particularly at convertibles. But discounted valuations for conventional preferreds--which all basically perpetuities--are likely to be with us for a while. And those 6% yields could well be double-digits at some point.
Dan N.
3:46
Roger, AGR looks like it’s at a great price right now, but the recent requests to regulators regarding offshore wind developments sound alarming. Essentially, development costs for offshore wind have gone up, perhaps by a lot. Morningstar thought these requests were alarming enough that they lowered their fair value estimate for AGR by almost 10%, since the offshore developments and projected profitability were much of the growth model.

Overreaction? Recommendation?

Thanks!
AvatarRoger Conrad
3:46
Hi Dan. As I indicated in answering a pre-chat question on offshore wind, I believe the soaring cost of debt capital has potentially changed the game for large projects whatever they are, at least for the near-term. That's not going to affect Avangrid's Vineyard offshore wind project, which is on track to enter service next year. But it has appeared to impact the cost of the Commonwealth project, which is what Avangrid is asking a higher PPA rate for. I'm not sure what Morningstar is basing its "fair value estimate" on. But 10% sounds a little steep for a couple of reasons. First, this is mostly a regulated utility. Contracted renewables such as offshore wind were only about one-third of 9-mo 2022 earnings. And their share will be less than 20% when Avangrid closes the merger with PNM Resources next year. Second, the company has the backing of Iberdrola SA--its effective owner at 81% plus. Third, they're likely going to be able to renegotiate the rate. And finally, if the offshore wind projects are shelved,
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