JotCast | 11/29/22 Capitalist Times Live Chat

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11/29/22 Capitalist Times Live Chat

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Elliott Gue

3:58

positions. In that environment, it seems to me that maybe the dollar's bull sentiment is reaching extreme levels that usually market a meaningful turn. Fundamentally, the big drivers of the dollar's strength have included interest rate differentials and commodity price spikes with the first carrying more weight in my mind. However, I do see the Fed slowing the pace of rate increases next month, hitting the pause button next year and, eventually, starting to cut rates as the economy enters recession in late 2023. So, I expect the interest rate differential is near a maximum. Second with oil prices coming off their springttime spike, a country like Japan doesn't need to sell as many yen to buy dollars needed to fund oil imports (a lessening tailwind for the $, headwind for the yen). Finally, historically the yen "spikes" against the dollar during period of market turmoil as Japanese investors repatriate their cash. So, I do think the dollar has peaked this cycle. To trade this shift,

In the Creating Wealth service, I recommended buying a small position in FXY, which is an ETF that tracks the yen against the dollar (rises when the yen gains value against the dollar). Note that the normal quote you see for the yen is the number of yen needed to buy $1 dollar so FXY will GAIN value when the yen/dollar rate falls – if the yen drops from 150 to the dollar to 135, for example, that would drive FXY higher.

3:59

Gold is another potential beneficiary of a weaker dollar (and a slower rise in US real interest rates). Also, I’d argue that the same trends will likely continue to benefit longer term Treasury bonds – 10-year and 20+ year yields going lower/prices going higher into 2023. So, I have recommended some sizable positions in ETFs tracking these markets in Creating Wealth as well.

While I also think the dollar is overstated as a driver of commodity prices, I do think that the weaker dollar is also a small tailwind for oil and other commodities.

David O

3:59

Roger,

Retired need income. One thing I learned painfully years ago is that it is never too late to sell. My ambulatory life expectancy is such that I wish not wait for the 5 years for AQN to right itself and have thus bailed. (Experienced the whole Kinder Morgan stuff for example.).

I worry about Dominion…outside of ETF or general market declines, individual sell offs are always bad news. In my life experiences, salt water always complicates things…not convinced ocean wind farms are viable outside of one’s imagination. Is Dominion going to go the route of AQN re a 50% haircut and probable dividend cut as well?

Thanks

Roger Conrad

3:59

Hi David. I understand the sentiment, though battered companies that stay resilient on the inside have historically recovered lost ground and then some when macro conditions improve.

As I said earlier in the chat, nothing in the stock market has a zero probability. And until Dominion does deliver the results of its now ongoing strategic review, we won't really have enough information to rule anything out. The fact that offshore wind is an established technology in Europe and Asia and that the Offshore Virginia project will be in regulated rate base do limit risk. So will the agreement with the AG that regulators are likely to approve. I also see a lot of opportunity for asset sales to improve the balance sheet without hitting earnings and the valuation is low (14X). I very much doubt your scenario of D following AQN--a wholly different situation. But there will be uncertainty until the strategic review is concluded.

Lou E

4:03

Hope you're doing well!

I have a question for today's live chat:

How would you rate the following three stocks, in terms of "Buy, Hold or Sell" and do you have any further comments on their strengths and weaknesses? The three issues are DVN, TTE and CQP.

Thanks for your commentary today and for your excellent guidance over the years.

Roger Conrad

4:03

Hi Lou. We cover all three in Energy and Income Advisor. DVN and TTE in the E&P/Services table and Cheniere in the MLPs/Midstream table. Current advice for the trio is Buy<40 for Devon, Buy<60 for TotalEnergies and Buy<55 for Cheniere. All three are currently trading above their highest recommended entry points--so we would wait on lower prices to buy.

Mike C.

4:05

Finally (and maybe related), what catalysts do you see for gold, looking ahead? I keep seeing that foreign central banks are buying large quantities of gold (which would seem to bullish for the metal), and I understand that the strong dollar has held gold back….what do you see for gold?

As always, many thanks for your guidance

Elliott Gue

4:05

I actually track a pretty simple model that uses 5-week price changes in the US dollar Index and real interest rates (I use 5-year Treasury Inflation-Protected Securities yields as a measure of real rates) to predict 5-week changes in gold prices. The model is pretty solid but what I really like to watch is when it's wrong -- when this model predicts gold prices will fall and they don't fall very much, as is the case this year. Usually that's a sign of strong underlying fundamental's for gold that will ultimately drive prices higher. I suspect the gold market has begun to sense the peak rate/peak dollar trends I outlined, which supports gold prices. Further, it's worth considering that stagflation environments like the 70s -- generally buoyant inflation and volatile economic growth, short business cycles -- tends to be bullish for gold. I suspect that "Stagflation" is a pretty good proxy for what the global economy will look like over the next few years.

guest

4:30

Roger/Elliott: In a late October publication Kiplinger projected an end of 23 inflation rate of 3.5%. Do you think this is reasonable/outlandish and how does it square with your expectations for a significant stock market drop in 23? thanks.

Elliott Gue

4:30

The current consensus on Wall Street is for 2023 CPI inflation to be about 4.3% yoy in 2023 and for the Core PCE index (the measure the Fed watches most closely) to be 3.5%. Interestingly, the 1-year US breakeven inflation rate -- this is a market-derived rate -- is much lower at 2.21% and the 2-year breakeven is 2.4%. Personally, I think a forecast in the 3.5% range for Core PCE in 2023 is reasonable and it does represent a significant drop from the current level of 5.1% on this basis. The reason is that there are really 2 pieces to inflation -- cyclical and "secular" or persistent inflation. Cyclical inflation will come down as the economy weakens and that's what the Fed can influence via interest rates. For example, in a recession the demand for most goods/services will drop and when demand falls, price usually falls also as the price system seeks to rebalance supply and demand. However, the problem, in my view is that "secular" inflation is out-of-control and likely to remain so for some time. Consider

Elliott Gue

4:30

the 1973 to 1975 recession, when the Fed hiked rates to 13% to try to quell inflation. The result -- a (very) nasty recession that brought down cyclical inflation. However soon after the Fed started cutting rates in 1974 and 1975 the economy recovered and inflation soared back, reaching new highs in 1980. A number of reasons for that. One is that some piece of inflation can't be cured by lower demand -- for example if consumers begin to "expect" higher inflation and demand higher wages to compensate for the loss of purchasing power, you get a labor-driven wage/price spiral. And, in oil markets, the problem in the 70's (just like today) was insufficient supply -- commodity prices didn't come down until the early 80s only AFTER a massive wave of investment in exploration and production that resulted in new supply from places like the North Sea (UKL/Norway), Mexico (Canterall in Bay of Campeche) and Alaska's north slope. My view is that you'll see inflation come down in the next recession (likely by mid-2023)

But it’s likely to remain well above the Fed’s target and, over the next few years, I see inflation remaining stubbornly elevated at levels that seem very high, because man consumers and investors these days have never experienced anything but the low inflation – low rate environment of the past few decades.

As far as the market drop I’m expecting in 2023, I think the main driver of that is two-fold. First, and most important, corporate earnings for most groups are likely to be hit hard in the coming recession – typically some 60% to 80% of stock market declines happen after the economy enters recession. And while the market bulls talk up the prospect of a Fed “pivot” it’s worth remembering that since 1972, the S&P 500 has declined an AVERAGE of about 25% after the Fed cuts interest rates by 75 basis points or more from a cycle peak.

Fed pivots are a SELL signal for stocks.

Second, a stagflation – basically the environment I’m looking for in coming years of rising inflation – is generally very bad news for stocks, particularly growth stocks that still dominate the S&P 500’s market cap.

4:31

Third, the zero interest rate / negative interest rate environment of the past 13 years has created significant economic damage in the form of 1. Bubbles in certain assets and 2. Malinvestment (inefficient allocation of capital in favor of growth industries).

Bear markets usually correct the excesses of the bull markets that precede themand that means correcting the distortions caused by ZIRP/NIRP monetary accommodation.

Ben F

4:35

Roger and Team -

Any thoughts on the news on TRP today? Stock down big today. Buying opportunity?

TC Energy sees higher 2023 costs for Coastal GasLink project

Roger Conrad

4:35

Hi Ben. I think the most important announcement today was TC Energy reaffirming 2023 EBITDA guidance growth of 5-7% and long-term comparable EBITDA growth of 6% through 2026. That's a pretty solid indication that ability to pay/grow dividends is not affected by the cost increase at the Coastal GasLink project. The company also said rising interest rates would not be a factor for its forecast period and affirmed completion times for the Southeast Gateway (2025) and Coastal GasLink (2023), which it also affirmed is 80% completed. One reason for the resilience is the additional costs will be partly borne by partners. Another is it's very much in demand for LNG exports. And TC has 95% of comparable EBITDA under long-term capacity contracts and/or rate regulation (not volumes sensitive.

I've rated TC a buy up to USD50 for some time--continue to do so for long-term minded, conservative investors. I expect another low to mid-single digit percentage dividend increase in February.

Roger Conrad

4:36

Note that the USD/CAD exchange rate affects TC Energy's NYSE-listed price and the USD value of its dividend. That's been a negative this year for both--I think it will be a positive in coming years as the energy super cycle continues.

Nolan

4:38

In sept. you recomended buy 400 KOLD @ 8, in dec you said sell 200 . Then they did a reverse split and I have 10 shares did I miss a sell recomendation? Thanks for all your advise

Elliott Gue

4:38

Thanks for the question. In ouir tradiong product we recommended shorting the US Natural Gas Fund (NYSE: UNG), because some readers can't or are reluctant to short stocks/ETFs, we recommended KOLD -- an inverse ETF that tracks gas -- as an alternative. Natgas prices slumped from September 2021 to December 2021 and we recommended taking profits on half the original position -- if memory servces the profit was about 60% for KOLD on half the position. We still recommend holding that remaining position. If you shorted UNG, the second half of the position is actually showing a small profit following the recent decline in gas/UNG. Unfortunately because of the way inverse ETFs like KOLD track gas, investors who bought KOLD as an alternative to shorting UNG have a loss on the second half of that position. Our view remains that natgas prices in the US have another leg lower this winter as storage is actually close to average as we enter winter heating season. We're looking to recommend exiting the last piece of

Elliott Gue

4:38

this position on the next dip. We'll issue a flash alert when we think the timing is right.

Christopher B

4:41

Hello Roger Conrad
I am looking at two different Canadian Renewable energy stocks.
1. Algonquin Power & Utilities Corp. (AQN.TO) with the main groups being Regulated Services Group and Renewable Energy Group. and with about a 10.3B market cap
2. Innergex Renewable Energy Inc. (INE.TO) operates as an independent renewable power producer in Canada, the United States, France, and Chile. and with about a 3.2B market cap

If you have time I would like to hear your take in on investing in these two companies?

I have already purchase AQN and after earning miss mainly due to higher interest rates, however "Arun Banskota, recently bought a whopping CA$1.5m worth of stock, at a price of CA$12.30" ... and I have been
accumulating the stock below this level

Roger Conrad

4:41

Hi Christopher. Like I said, I'm also encouraged by insider buying. And I think once Algonquin re-sets guidance, everyone who's on the fence now rating the stock hold is likely to move back to buy, particularly from this price level. Until there is guidance, though, it's tough to see a meaningful advance in the stock.

Interestingly, we saw much the same thing with Innergex the past couple years, as that company had in effect growing pains from rapid expansion. Those challenges now appear to be behind the company, as my recap of Q3 earnings in Conrad's Utility Investor Utility Report Card comments indicate.

As you point out, Algonquin with Kentucky Power will be more than 80% a utility, so arguably less risk than Innergex once we have guidance. Innergex is a buy at USD14 or lower--it's priced in and pays dividends in CAD meaning there's currency risk while AQN pays in US dollars.

Cliff W.

4:48

our E&P portfolio still has DVN max buy price at 40. Still think that is maximum buy point?

Hasn't been there since Dec. 21 and has been raising distributions aggressively (sign of health) and currently yielding over 7.5%, exceptional for an E&P.

Why is max buy still only 40?

Thanks in advance for response

Cheers

Roger Conrad

4:48

Hi Cliff. If you look at the broader coverage universe you'll see quite a few companies that, like Devon, sell for a much higher price than our maximum recommended entry points. As we've said in the EIA issue that just posted today as well as throughout this chat, we're in the mode of harvesting some gains from the bigger winners--so we're not inclined to advise chasing stocks that have run so much higher like Devon for example. As for the yield, remember that this company pays a variable dividend. The base amount is 11 cents and the rest is calculated as 50% of free cash flow after dividends, which varies with energy prices and would decline substantially in a recession that even temporarily hit oil prices.

Daniel N

4:57

Dear Roger-

1) Any reason why we shouldn’t be in BEP/PRA yielding 7.3% rather than BEP yielding only 4.4? BEP/PRA is trading far below par value now.

2) Any dangers in being in the North American mid stream energy piping services at the moment? ENB, ET, EPD, KMI, PBA are the current holdings, so sticking to the majors.

Best.

Roger Conrad

4:57

Hi Daniel. One reason to favor the common shares is that dividends will be increased every year, with the target a mid-single digit percentage that should at least mostly keep up with inflation. The company does have several floating rate preferred stocks that trade in and pay interest in Canadian dollars, which I think will be a plus at some point but for now adds currency risk. The fixed rate preferreds are the ones that trade at sizable discounts to par value, the reason being they lose ground in an environment of rising interest rates and inflation. The common also trades for more than 40% below its all-time high in Q1 2021, so there's considerably more upside for principal as the company keeps growing and stock market conditions at some point improve.

I think sticking to the best in class midstream companies is still the best policy. The sector on the whole has adapted to a soft volumes environment by cutting costs and debt. But only the best have been able to balance out weakness in some regions.

Roger Conrad

4:57

and the best midstreams are also self-funding all CAPEX plus dividends and debt service with spare cash left over. They'll weather a recession, whereas the weaker may be overwhelmed by the rising cost of debt.

Allan

5:00

Would you please comment on CCJ and LTHM as Buy, Sell or Hold. Thank you.

Elliott Gue

5:00

We generally like Cameco (CCJ), the highest quality of the uranium mining names. There's growing recognition that nuclear power must play an important role in the power stack. Japan, which turned very anti-nuclear following the Fukushima accident more than a decade ago, is now talking about restarting more reactors, extending operating licenses on plants and developing next-generation reactors. The fact is that given Japan's lack of domestic oil and gas resources, reliance on imports, nuclear is a necessity and it doesn't emit carbon dioxide either. In Europe, where spiking gas prices have forced some countries to increase coal burns, nuclear is also likely to see some interest. At any rate, CCJ has seen an uptick in long-term contracting interest for uranium supply, which is a solid indicator that demand is picking up. Long term supply contracts should also begin generating more significant free cash flow for CCJ. LTHM isn't a stock I follow closely -- generally, we've been cautious in our approach toward

Elliott Gue

5:00

in alternative energy/Electric Vehicle stocks (like LTHM, a lithium supplier) in this environment.

Sohel

5:02

Hi Roger, Thanks for holding these chats. Very useful. I look forward to them every month! Also, thanks for the revamp of the latest EIA issue with clear instructions on what to sell (and how much). Is it best to sit on the cash for a bit given Elliot's view of approaching "sell everything" moment? Or should we simply take from XOM/VLO etc and put it to work right away into CHK for example?

Roger Conrad

5:02

Thanks for the feedback Sohel. I think for the most part, we're comfortable with a higher cash position in this market, even for a sector we're super long-term bullish on like energy. We did put some of the cash from harvesting profits to work in a couple of names this time. But most went to the money market fund. And I guess at this point we're overall counseling patience regarding fresh money--as well as what can be described as an incremental approach to investing, a little now, a little later. In other words, super cycles take years to unfold and we think energy sector stock prices are likely to get cheaper again before we move onto the next big upleg. Hope that answers your question.

Richard L

5:08

Hello Roger,
I always ask about SO but suddenly I feel comfortable with my position. Looking forward to larger dividend increases. Today I need advice on AQN. I have a small position, less than 1/2% of a percent of my overall portfolio. I am down about 40% in AQN in a short period of time. I want to double down but need your blessing. Thanks in advance. Long time subscriber.

Roger Conrad

5:08

Hi Richard. I guess I get more comfortable with Southern every time they announce more progress toward starting up Vogtle unit 3--still expected in Q1--and Vogtle 4 (Q4 2023). I really liked the reduction in the estimate for the total cost, which was a first. And management is pretty clear that once the new nuclear is in rate base and operating/CAPEX costs start to come down, we're going to start seeing mid-single digit percentage dividend growth, even if we see a recession as we expect. Still keeping the buy at 65 or lower though.

As for Algonquin, I don't advise adding to positions with fresh money until there's re-set guidance, which management has promised for Investor Day in early 2023. That advice is subject to my ability to obtain more information. But at this point, there's too much we don't know about management's plans for me to be comfortable recommending new investment in AQN.

Martin J

5:12

Thanks again for a great service! I have been subscribing for many years. Any comments on beaten down individual preferreds-over the last couple of months I have picked up 2 dozen well under par in midstream, hospitality reits, mreits and others. Many of these are now rising but yields are still good in in 7-10% range with likely capital appreciation to par eventually.

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