JotCast | 12/28/22 Capitalist Times Live Chat

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12/28/22 Capitalist Times Live Chat

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Guest

5:12

Roger: Even though you have advised that AQN be sold, for those of us still holding the common stock, will you continue to provide any analysis in any of your future newsletters about it? For example, the company intends to have some meeting in early January according to your last CUI issue. Thanks. BHJ

Roger Conrad

5:12

Yes. Algonquin will continue to be tracked in the Utility Report Card coverage universe as before in CUI. And of course, the convertible preferred is now an Aggressive Portfolio holding, and I view it as basically another way to hold the common stock--but without the near-term risk to income. So it will be getting prime coverage in the Portfolio section as well as events unfold.

Terry

5:19

In recent years governments have printed money substantial amounts of money augmented by increased leverage in the financial markets generally. Consequently, prices skyrocketed because that money had to go somewhere and cash became trash. Now that process seems to be reversing and the accepted view is that we go back to a 3 handle on long term rates. Does that seem logical?

Elliott Gue

5:19

I think that's a reasonable assumption. In my view, the experiment with near-zero/negative rates and quantitative easing is at an end. Long before we saw price inflation via measures like CPI we saw inflation in financial assets -- soaring valuations for growth stocks, which eventually spread to pseudo assets like bitcoin "meme" stocks and the like. The problem with this easy money bubble is one of what the Austrian economists might call "malinvestment." Freely capital markets function by directing capital to companies/industries where it's most needed, but when capital is "literally" free that breaks down. So, you had companies like Snap Inc and Carvana showered with cheap money, which they invested in base businesses that bleed cash. Meanwhile you had companies like XOM or the smaller shale names starved of capital, and therefore unwilling and/or unable to invest in new oil/gas supply that's (obviously) so badly needed today. Malinvestment may sound like an esoteric concept but it has real world

Elliott Gue

5:19

consequences. I think what some may be realizing now is that you can't put the free money genie back in the bottle -- if you do extreme QE/fiscal stimulus like 2020 you'll just end up with inflation and malinvestment. The Fed estimates long-term equilibrium Fed Funds rate at 2.5% and so, if that estimate is in the ballpark, you'd expect a positive slope to the yield curve longer term in a normal market environment and 10-Year Treasury yields well north of 3% on average. I suspect the bigger risk longer term is that 2.5% long term equilibrium Fed Funds rate is actually too low and rates will have to rise more than most people expect (again, I am bullish T-bonds amid a market decline in 2023, but this is a real problem over a 3+ year investment horizon in my view).

Barry J

5:21

Roger:
Can you kindly provide us readers with your assessments of NRG and AGR for the next year?
NRG had a 10% sudden fall in early December. And AGR continues to remain near your dream price of $40.
Thanks.

Roger Conrad

5:21

NRG's drop as noted in my December Utility Report Card comments is because of $5.2 bil of debt they're taking on the purchase Vivint Home Smart Home. Interestingly, credit raters Fitch and Moody's immediately affirmed NRG's credit rating, noting it has ample financial resources to eliminate that debt over time, as well as the positive impact on cash flow from adding that business. I believe shares are no longer overvalued as they were earlier this year and NRG is again a buy up to 33.

Avangrid is a buy at 45 or less. The company faces a series of challenges next year--closing the PNM Resources merger, completing a proposed power line to bring Canadian energy to New England, getting the Vineyard offshore wind facility up and running, renegotiating rates on other offshore projects to reflect costs and a New York utility billing investigation. But progress on any will potentially lift the stock. And the dividend is safe.

Jeff B

5:26

I've held BCE for years. Its hasn't done so well this year, but some of it could be the dollar. The dividend is over 6%. Do you think they can maintain and grow it in the future?

Roger Conrad

5:26

BCE's total return in Canadian dollars is -4.6% year to date, while it's -11.1% in US dollars--so currency has had an impact just as it has with any non-US stock. But even in US dollar terms, its loss is only about half the S&P 500--and it stacks up pretty well to the S&P Telecom Index, which is lower by -41%. That's pretty strong outperformance. And I think one reason is the very reliable dividend, which is backed by free cash flow as well as earnings growth. We'll see what management decides in February, which is when the next dividend increase is expected and Q4 results/guidance will be announced. But based on Q3 results, we should see at least a mid-single digit boost.

Bonnie Beth

5:27

Thank you Roger. Always appreciate your insights and recommendations! Happy Holidays and Happy New Year to you and your family.

Roger Conrad

5:27

Thank you Bonnie. Same to you and yours.

Robert P

5:33

Hello Roger,

Thank you for your guidance in 2022! 2023 will also be a challenge as well.

Walgreens: Although you do not cover WBA, I am curious of your opinion as it's value becomes more compelling. Thanks!

Roger Conrad

5:33

I prefer CVS Inc in the pharmacy/health insurance space for its integrated business model and stronger balance sheet heading into a recession. It's a buy up to 100. WBA is cheaper with a lower P/E and higher yield. And the companies are operationally very similar, having also settled remaining legal liability from the opioid crisis. But CVS is growing its dividend at a much faster pace than Walgreens and has the wherewithal for further increases. I will of course continue to compare and contrast to determine which stock is more suitable for our managed income portfolio CUI Plus/CT Income. But at this point, I prefer CVS.

Bill G.

5:36

MC-HNY to Roger/Elliott:
Great call Elliott on NEW. Wish I'd have paid attention and bought some at 39.
I wonder if you have any year end tax loss selling buying ideas?
Issues like T, WBD, TSLA, GOOGL, or AMZN or you tell me?
Roger, any utility issues you think are depressed and may jump ahead in 2023?
Thanks to both of you

Roger Conrad

5:36

Hi Bill. In terms of depressed utility issues, that will be a big focus in the upcoming January issue of CUI--which like every year has picks and pans for 2023. I would say Dominion Energy (NYSE: D) and Algonquin Power & Utilities (NYSE: AQN) are the cheapest, mainly because we're waiting to see where their managements set guidance for 2023 and beyond as part of strategic reviews. I think both are likely to perform much better going forward. But there's also higher risk at this point, at least until we get a better idea of where they're headed.

Robert J.

5:38

BEPH & BEPI seem like no brainers paying around 8% interest that is considered qualified and they will make whole for any Canadian holding taxes. BEPH can be converted to preferred but these seem like one of the best lower risk securities available esp with 15% tax rate in a qualified account. Am I missing anything?

Roger Conrad

5:38

Robert. I'm not sure what securities you're referring to. Can you clarify?

Michael C.

5:39

First of all, it’s been a very, very good year for both my taxed and retirement accounts, and that is due in large measure to the guidance, perspectives, and model portfolios across all of your services. I am deeply appreciative of the value, rationality, and insight you provide. Thank you! And best wishes in the new year to the entire CT team!

Roger Conrad

5:39

Thank you for those kind words Michael, and the best to you and yours as well.

Michael C.

5:44

A bunch of questions, which I think go to both of you.

   I’ve got a small tranche of NGLOY, which is up nicely. I’m inclined to continue to hold it. Given your outlook on metals, thoughts?
   Given your China outlook (in the Metals newsletter), do you see a place for emerging markets or China exposure in Elliott’s ATR portfolio in 2023? I’m seeing several credible sources beginning to warm to EM (both equities and bonds), now that China has abandoned the zero covid strategy.
   The mis-named Inflation Reduction Act seems like it would impact multiple names across your services, from HASI to firms like KMI working on carbon sequestration to utilities that Roger’s noted (NextEra, WEC, and AES). Is this a valid notion, and if so, when would we see these benefits? And conversely, do you see material risk in the methane tax to any model portfolio names?

Roger Conrad

5:44

Starting with thoughts on China and metals, as you probably gathered from reading this month's report, we're very long-term bullish on the mining sector--and Anglo American as a global leaders is definitely on our list. We are, however, very concerned near-term about the possibility of a recession, which would probably take metals lower. And we see China's reopening as taking a while to meaningfully impact actual metals demand. Bottom line--this is a time to hold positions and possibly incrementally move into new ones. But it's no time to be in a hurry--and that applies to emerging markets for the same reason.

As for the IRA, it's definitely positive for investment long-term for a wide range of companies, including the companies you've named. And it should be a growth catalyst for years to come. But these stocks too are being affected by economic worries--though more rising interest rates' impact on investment than a recession, which they should weather.

Roger Conrad

5:47

Finally, as for methane tax, companies have several years to reduce leaks--and higher quality midstreams, producers etc are already doing so. We're still a ways out from really being able to gauge risk here. But one thing we've seen with the windfall profits taxes on energy companies is the impact on the bottom line is generally dwarfed by what's going on with energy prices--so we don't see this even in a worst case really undermining energy companies' value propositions--at least at this time.

Guest

5:54

Any thoughts on LNG?

Roger Conrad

5:54

We don't technically track LNG. But we do track Cheniere Energy Partners (NYSE: CQP) in our MLPs and Midstream coverage universe in Energy and Income Advisor, ownership of which is LNG's primary asset. CQP is a buy up to 55, which is slightly above the current level. The LNG business is relatively slow moving, as it takes years to site, permit, finance and build new capacity. The company is seeing very good business now given the global demand for US LNG. And the base dividend should continue to grow. But the variable portion will be changeable as new capacity is developed. It's a steady business model backed by a solid balance sheet.

Victor

5:56

The Biden administration released more than 200 million barrels of oil on an “emergency basis” and they are supposed to stop this month. They want to pay $67 a barrel to refill it. Last time I checked WTI prices were close to $80 as prices are going back up. The DOE is soliciting bids from producers. What oil company will be interested in doing business with Biden at that price? And, if they do refill it what will be the impact on oil prices?

Elliott Gue

5:56

Refilling SPR is unlikely to have an impact on prices in the near term. The Biden Administration asked for bids from producers for 3 million bbl in February, which represents just 2 days worth of their SPR sales at peak rates earlier this year. It's a token gesture, not a meaningful move. If you look at the futures curve, you can see that oil for delivery around the middle of 2025 trades under $70/bbl and I wouldn't be surprised to see more dips in oil in early 2023, so I do think it's possible they may be able to buy some barrels in that $70/bbl range, but the volumes won't be enough to really move the needle. I suppose it's just one more modest support for oil on dips to the low $70's. The bigger impact is the end of SPR releases, which eliminates a source of oil supply that had been artificially restraining prices.

Victor

5:57

A couple of weeks ago a big announcement was made about a breakthrough in fusion energy. You would think that this technology is decades away but some including Jeff Brown from Brownstone research claim that commercial applications can become available in a matter of a few years. Do you have any information about this technology and how it could impact the energy sector?

Elliott Gue

5:57

I don't think there will be any commercial applications for many years -- maybe 10+ years in the future, but I don't think it'll have any meaningful impact for energy investors.

Eric

5:58

For fresh funds with a 2-3 year horizon, what 5 companies are most attractive among the utility, renewable energy, integrated oil, E&P, oil services, refiner and midstream sectors?

Roger Conrad

5:58

Hi Eric. We like a lot of companies with a 2-3 year time horizon. But we would also not be in a big hurry to invest fresh funds at this time, given our cautious outlook for the overall economy and stock market. If you're looking for a list of the highest quality companies in these sectors, the model Portfolios are the pace to look. I've identified Energy Transfer (ET) as my top midstream pick. And I'll have two new utility recommendations in the January CUI in a couple weeks. But right now we believe anything you do should be gradual and incremental--including in stocks trading below Dream Buy prices.

Guest

5:58

Any thoughts on LNG? Buy, Sell , Hold? Thanks

Roger Conrad

5:58

Buy at 55 or less.

Eric

6:00

2 years ago there was a deep freeze in Texas that resulted in large one-time gains for a number of pipeline companies such as KMI. Did the freeze several days ago result in the same and if so, which companies benefited the most?

Roger Conrad

6:00

It doesn't appear so at this time. We did see some spikes in natural gas prices particularly in the Northeast US, which lacks pipeline capacity to meet demand. And these were passed on to electricity and natural gas customers. But at this point, what happened in Texas doesn't appear to be of the magnitude we saw with Winter Storm Uri in 2021.

Victor

6:01

Hi Elliott, I arrived a little late to the chat but in case you didn't please comment on your thoughts on oil prices in Q1 and Q2 of 2023. Thank you.

Elliott Gue

6:01

In a nutshell, I think the Saudis would cut production on dips around $70 and sustained prices below $70 are too low to incentivize badly needed supply. So I see that $70/bbl region as a sort of floor for oil in early 2023. On the other side of the equation I think upside for oil is limited by a weakening global economy -- I wouldn't expect sustained moves above roughly $90. Longer term, I think $80/bbl to $90/bbl +-- a higher for longer range -- is a reasonable level needed to incentive investment in adequate supply.

JD1716

6:05

Elliott & Roger: what are your recommendations for relatively high yield and "safe" bond ETFs in this high volatility / high interest rate environment? what's your opinion of convertible bonds such as CHI?

Roger Conrad

6:05

We really don't have any for you at this time. Our view is interest rates are headed higher next year as the Fed keeps squeezing, so we'd confine bond and fixed income investments to the very short term (18 months or less to maturity). And the best way to do that is to buy individual bonds of companies we like--such as those featured in the December issue of Conrad's Utility Investor. CHI is by the way a closed-end fund trading at a premium of 7% plus to the value of its assets and utilizing heavy leverage (28.8% of assets) to maintain its distribution--which has been frozen since Feb 2021. The payout is at management's discretion and I see it has focused mostly on short-term bonds among its top holdings. But NAV and the premium should be considered at risk to rising interest rates--and the use of leverage will pressure the dividend if prices fall far enough.

Guest

6:11

I know Medtronic MDT doesn't fit in some of your newsletters (maybe Creating Wealth), but do you have any opinions on it? If not, do you recommend any "no nonsense" investment newsletters or authors like yourselves that cover that type of company?

Elliott Gue

6:11

I have recommended Medtronic in the past in Creating Wealth, but don't do so at the moment. Generally, I think it's a good company though they've had some setbacks in terms of new products lately and they did face some headwinds related to postponement of elective surgeries amid the coronavirus outbreak of the past few years. It's the sort of name I keep on my radar screen but not one I'm recommending right now mainly becausew of 1. My concerns about the broader market and 2. Poor momentum in MDT's stock -- in markets like this I prefer to recommend stocks showing some sign of strength rather than names like MDT in a downtrend.

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