JotCast | 10/27/22 Capitalist Times Live Chat

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10/27/22 Capitalist Times Live Chat

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Robert

5:31

Do you follow the info regarding the lack of liquidity within the western banking system and the growing number of banks applying for USD due to the diminishing financial health of the repo market? If so, do you have a general overview going forward ? TIA. Hope you guys are enjoying the current beautiful fall weather. Take care.

Elliott Gue

5:31

Thanks for the question. I am definitely enjoying the fall weather -- down here in Florida, things cooled down rapidly after Ian passed by my area. Yes, I follow the liquidity concerns and there are definitely a number of moving parts. One thing is the natural effect of quantitative tightening. As the Fed is no longer buying bonds, that's a major buyer of Treasury debt gone and this naturally harms liquidity in credit markets. That's one reason we're hearing talk of the Treasury doing debt buybacks in an effort to boost liquidity. QT is also bringing down reserves across the banking system. The total size of the Fed's balance sheet peaked in April at $8.965 trillion, falling just shy of $250 billion since that time. Bank reserves however peaked late last year and are down by around $1.233 trillion. At some point -- I've heard a lot of estimates in the $2 to $2.5 trillion range -- bank reserves will get to a point that it really starts to hit credit markets. We're not quite there yet, but at the current rate

Elliott Gue

5:31

of decline, and with reserves at about $3 trillion, it won't be long. And it's not only credit and dollar funding markets that have been losing liquidity -- it's the stock market as well. In general, I think this is all a function of what we've seen over the past 15 years -- when you flood the banking system with easy money for more than a decade and then try to reverse that, the results are unpredictable.

Roman S

5:35

Warren Buffett's interest in Occidental OXY has run it way up in price. Do you share his enthusiasm of this company?

Elliott Gue

5:35

Yes, OXY is one of our model portfolio recommendations and was one of our top picks back at the beginning of the year. Long-term it's still a good value in our opinion though we haven't boosted our buy target lattely because the stock has run up, in part, on the Buffett connection. That means there are better values elsewhere. We continue to recommend buying OXY on dips.

Dennis Hajek

5:42

Thoughts on Merck (MRK) and and Consolidated Water (CWCO) after large price increases.

Roger Conrad

5:42

Hi Dennis. Both stocks are above my highest recommended entry points, CWCO ahead of earnings (Nov 15 expected) but following a major contract win and MRK following a very strong Q3 report and guidance increase for 2022. I think both are high quality companies and rate them holds at current prices. I would be confident holding them through an extended bear market and recession, but view their prices as a bit elevated given the increased risk of both.

Phil

5:43

I emailed a question about GLOP before the start of the livechat but haven’t seen an answer yet. Comments please.

Roger Conrad

5:43

Hi Phil. I did see it and answer it. Short answer is we see better places for your money.

Alex M

5:48

Gentlemen, with treasury rates recently declining slightly (2-year was over 4.5% just last week), do you think we are approaching a stabilization phase for rates or are they expected to rise further? Thanks.

Elliott Gue

5:48

Generally, the yield curve has inverted this year because short term rates have risen far faster than yields on longer term bonds (the 10-Year and 20+ year Treasuries for example) though yields are higher across the curve. Short term rates are generally driven by Fed policy -- the Fed funds futures market is looking for 75 basis points on November 2nd, 50 in December and then maybe another 25 basis point hike or two early next year. Peak short term rates are expected to be somewhere around 4.75%. If that's a correct outlook for Fed policy, then the 2-year near the current level of 4.25% is about right.

Elliott Gue

5:48

The yield on longer-term bonds -- like the 10-Year -- is driven more by market expectations for future growth and inflation. The recent decline in 10-year yields likely reflects growing market expectations for recession. My expectation is that 10-year and 20+ year yields have likely peaked (bond prices have bottomed) or this cycle, and investors will gravitate toward fixed income into 2023 as a safe haven from recession. The main market narrative may already be shifting from fears over higher rates to fears over recession.

Jim N.

5:48

Thoughts on EVA and PDX? As always, thanks for input.

Roger Conrad

5:48

Hi Jim. Thanks for your question. I assume you mean PXD, Pioneer. it's still a Portfolio Holding as a buy at 230 or less. We're still going through the Q3 earnings report but it appears to be quite robust and management declared another strong quarterly dividend of $5.71 per share, which was lower than the $8.57 of the previous quarter but well above the combined $3.64 of the year ago period. They're also keeping strategy and operations conservative.

As for Enviva, we cover it in our MLPs and Midstream coverage universe in EIA, which you can access under the Portfolios tab on the web site. They report earnings on November 2 and I expect to see a dividend increase then as well--though rating the stock a hold at this time.

Roman S

5:50

Any quick thoughts on Marathon MRO and Devon Energy DVN ? Both have doubled since I bought them

Elliott Gue

5:50

Both MRO and DVN are generally among the more leveraged producers to commodity prices, so they both tend to outperform when commodity prices are strong. The "cost" is greater volatility. We generally like them both -- Generally we've had a better view of DVN than MRO as I have some concerns about MRO's longer-term inventory of wells and growth profile.

Jimmy

5:58

Elliott.Roger: I do hope when you see a coming end to the current rally you will give us a heads up ASAP. The mixed message we will receive on CNBC will not be sufficiently clear.

Elliott Gue

5:58

Generally, we see the current rally persisting for years. Of course, there will be shorter term fluctuations -- higher and lower -- around that general uptrend. Historically out response is to recommend lightening up on certain positions on the "Rips" and then using the dips to accumulate favored names. Rest assured though, it's something we watch closely on a daily basis and if we see signs of trouble for individual names or the market as a whole, we'll issue an alert or highlight that risk in the regular issues. And, yes, we'd agree watching or reading mainstream financial media can give you whiplash sometimes; the swings from wildly bullish to wildly bearish and back again can be difficult to follow.

Guest

6:02

Hi Roger and Elliott: All of us readers sure appreciate your wise and insightful analyses for these many years. Here is a simple question for you. Sorry that I cannot grasp what other advisors have been stating. If VZ and T have long term debt (like 20, 30 or 40 year bonds), why would the Fed's short term interest rate increases be of concern to them? Won't the long-term debt be a reason to keep it and not refinance at higher rates? One newsletter wrote ".Like AT&T, Verizon's net unsecured debt of $131.4 billion at the end of the quarter is an impediment to its profit margin as borrowing costs go up. To its credit, Verizon was able to decrease its net debt load slightly during the quarter, but not enough to offset the impact rising interest rates will have on its overall debt servicing costs." Is not VZ's debt all long term. This advisor colleague of yours has been questioning the ability of T and VZ to pay their debt and grow their dividends. Your thoughts please? Thanks.

Roger Conrad

6:02

Thanks for that question. Yes it does sound like a lack of understanding on the part of the advisor--or at least inability to access critical information. Verizon has $131.1 bil of total debt as of the end of Q3--when they last posted results. Of that $5.3 billion is floating rate, all maturing by the end of 2029 and some in Australian dollars--interest on which has actually become cheaper with the AUD's decline against the USD. The average weighted fixed coupon of the bonds is 3.21% with average weighted maturity of 14.55 years. To put the floating rate portion into perspective, Verizon could pay it all off with cash left over after paying all industry-leading CAPEX and recently raised dividend.

AT&T has $149 bil, of which $8.3 is floating and $2 bil is variable. That compares to $6 bil of excess free cash flow in 2022 after CAPEX and dividends. Average weighted coupon is 3.75% for 16.2 years. Bottom line is so long as T and VZ generate such free cash flow, their fixed rate debt guards against rate shock.

Jimmy

6:07

Roger: With your thoughts that 6% yields on preferred stock could possibly go to double digits, for those of us who have amassed a reasonable stockpile of cash, would it not be rational to just buy shorter term CD's and wait for the markets to bottom? I am cognizant of Elliott's statement that since 1970, markets have never made a bottom until the FED has lowered interest rates at least once.

Roger Conrad

6:07

I really do prefer an incremental approach for those interested in building positions in stocks--putting some money to work earning a big yield now and coming with the rest later, rather than waiting for an all clear signal to pile in with everything. But a better alternative to CDs would be to work with your broker to buy some one-year investment bonds opportunistically. You'll have the ability to sell if you find you want to buy stocks. The yields on some of them are nearly as high. And with a one year maturity there's really no interest rate risk, or credit risk if you stick with a sector like utilities.

jeff

6:13

What is you opinion on DCP? I currently own EPD, MPLX, ENB, KMI, CEQP, and MMP

Roger Conrad

6:13

Hi Jeff. DCP Midstream is being taken private by Phillips 66 at a proposed price of $34.75 per share in cash. That's part of an asset swap deal with Enbridge Inc, which was the other owner of DCP's general partner through its purchase of Spectra Energy in the previous decade. The current price of DCP reflects the expectation that Phillips will be forced to make a higher bid to get the transaction done. But at this level, it's pretty aggressive. The business is solid and should be increasingly well as the energy cycle progresses. But it's hard to see DCP shares going for much more than they are now. And the yield is now just 4.4% with no real upside until at least next summer. The rest of the midstreams you name are solid--I think HESM and ET are also good candidates for a high quality midstream portfolio.

jeff

6:16

How financially strong is AGR?

Roger Conrad

6:16

Quite. It rates a BBB+ as a standalone entity. But it's basically the US arm of Iberdrola SA, which owns 81.65% of the company and also rates BBB+. I won't repeat everything I said answering a question about Avangrid's offshore wind investments. But 80% of earnings are from regulated utilities--a percentage that will hit 90% plus with the PNM Resources merger likely to be completed early next year. As I noted earlier in the chat, I do have some questions about the cost of offshore wind with capital costs soaring as they have. But Avangrid has multiple options to meet or beat its mid-single digit percentage earnings growth guidance the next few years--and after Q3 results it affirmed 2022 guidance as well.

Alex M

6:21

Hi Roger. Do you have a favorite in the apartment REIT space ( AVB, MAA, ESS, CPT, etc.)? And what makes it your favorite? Thank you.

Roger Conrad

6:21

Hi Alex. I'd encourage you to check out our REIT Sheet advisory, which covers all of these residential REITs and several others. We currently have around 80 names in the total coverage universe, spanning all sectors. Call Sherry at 1-877-302-0749 if you're interested.

On a long-term basis, I tend to favor the apartment REITs that mostly focus on higher end tenants in areas away from the coast. Mid-America Apartments would be a good example. During the pandemic, however, we were able to pick up some of the larger names like AvalonBay very cheaply, and we have recently had another opportunity to buy MAA and AVB below highest recommended entry points.

Alex M

6:25

Hi Roger. Any interest in the cell tower REITs at these levels? Looks like CCI, AMT, and SBAC have come down quite a bit. Thank you.

Roger Conrad

6:25

It really does boil down to price with the communications infrastructure REITs--as the businesses have been very reliable in terms of growth. I do believe we will see at least some long-term valuation reset lower for American Tower and SBAC in particular, as they've tended to command extremely high valuations and their big telecom customers are nearing the end of their elevated CAPEX cycle--while smaller telecoms continue to shrink. I would expect to see AMT, CCI etc as among the leaders when the stock market finally does bottom and head higher. But generally speaking there are other REITs I'm more interested in at this time for yield.

jeff

6:27

I was interested in you opinion on how solid DCP is. I might have asked under the wrong symbol.

Roger Conrad

6:27

Hope you saw my answer to your question. They're really off the table now as far as long-term investment. Phillips 66 is the GP and wants to take it private--whether it does so now under the current offer or a slightly raised one or goes away for a while, I would expect limited upside. It is a solid midstream company.

jeff

6:29

Do you think AQNU, could be another CNPB? I did very well on the later.

Roger Conrad

6:29

I think it certainly could, though a lot will depend on market conditions. Centerpoint worked out so well because they were able to close the sale of their Enable Midstream interest, and the Energy Transfer LP shares received wound up being worth considerably more than they expected. Algonquin does have M&A in progress that I think will lift its share price back to mid-teens in US dollar terms. But the market is a lot more unsettled at this time, so you might have to wait until after the conversion for the value of your stock to rise.

Roman S

6:33

Hello and thank you for doing the live chat. I have gone through the list of stocks where you have the "buy under" prices, and I've set price alerts on my brokerage account. Is there somewhere on the website where you have a list of stocks with a "sell over" price? I don't want to be greedy and wait too long to sell stocks to lock in profits. For example, I would normally sell a stock that hit an all-time high (ExxonMobil for example) but you seem to be recommending to hold it because it has the potential of going much higher so I'm not really sure what to do.

Roger Conrad

6:33

We have had a regular feature in Conrad's Utility Investor where we've identified candidates for taking partial profits. We have not so far had an equivalent feature in Energy and Income Advisor, mainly because we've been so early in the cycle. But we have advised taking profits in some model portfolio companies over the past year or so, when we thought prices had reached extremes. And we will do so in the future.

Guest

6:38

Has your view changed on HASI?

Roger Conrad

6:38

I really want to see what they report for Q3 and updated guidance on November 3. Leaving aside all the chatter from short sellers about accounting issues--which I think management has answered--there are two main issues here so far as I'm concerned. First is what's happening to its cost of capital and how that's affecting its ability to invest in new loans and project equity. Second is how recession concerns, rising energy prices and higher borrowing costs are affecting demand for projects. My belief is Hannon is continuing to manage both and that the stock price is already pricing in some reduction in guidance growth. If that proves to be the case, I would expect some recovery in the stock. If management avoids a guidance cut, the move could be substantial given the high level of short interest, provided the stock market doesn't resume a steep decline in the next week or so. On the other hand, if there's a bigger than expected guidance cut or a drop in the stock market, shares could go lower.

Roger Conrad

6:38

I won't mind the decline in share price if the underlying company shows it's healthy. But I won't advise any more fresh money into the position until Q3 numbers confirm it.

Guest

6:41

Gents: Why is ET trading at it 1 year high of $12.57/share? I forgot - what is your maximum purchase price for ET? Thanks.

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