JotCast | 6/27/24 Capitalist Times Live Chat

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6/27/24 Capitalist Times Live Chat

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Frank

4:16

For royalties you have FNV in gold, BSM in gas, are there any other royalty companies out there worth considering?

Roger Conrad

4:16

I think Alliance Resource Partners would be a good choice. It's a coal royalty company with a growing interest in oil and gas royalty lands. I answered a question in detail about the company earlier in the chat. There's also discussion in the just posted EIA issue, as well as the earnings discussion in the May issue. The only catch is it's now trading a bit over my highest recommended entry point of 22. But I think we'll see that price again.

You should also take a look at the list of variable rate dividend companies in the current issue--as like royalty companies they pay dividends in line with profits. The higher earnings go, the higher your dividend--a good thing in a long-term energy upcycle.

Ed

4:23

Working with a Charity with a good reserve. Want to be able to manage risk. Subscribed to Smart Bonds. Want to use some guaranteed returns using under 2 year treasuries and CD's and MM. What would they replace risk wise in the smart Bond portfolio.? Thanks

Elliott Gue

4:23

Thanks for the question and for subscribing to Smart Bonds. The iShares 0-3 Month Treasury Bond ETF (SGOV) in the portfolio holds T-Bills; most money market funds are heavily invested in T-Bills as well (along with the Fed's Reverse Repo Facility). So, from a risk perspective, I'd say the SGOV ETF is probably the closest to a Money Market Fund/CD in the model portfolio. Of course, when you get out to 2-Year Treasuries you're picking up a bit more duration and rate exposure. However, I'd say that SGOV is probably the closest in the model.

Elliott Gue

4:29

Quite a few questions regarding Smart Bonds and Bond ETFs via e-mail in the past few weeks -- Roger and I answered most of them on the webinars we've hosted. However, I've also created a new Substack publication to cover these markets -- some of the commentary will be free of charge there and I can certainly answer questions you might have about bonds or related ETFs. It's available here: https://smartbonds.substack.com/ if you're interested in learning more. I've already posted a few articles there and you can ask a question by simply commenting under any of the articles we've posted.

Victor

4:33

Elliott, VLO dropped from its highs and it’s been moving sideways for a few weeks. It seems to be holding at a support level. What is your opinion on VLO? Do you still see VLO much higher by the end of the year?

Elliott Gue

4:33

VLO has been following the crack spreads -- refinancing profit margins. They peaked in March and came down through late May. Sometimes this can be a signal of weak demand; however, that doesn't appear to be the case this year. Refiners came back from their spring maintenance faster than expected and have been running flat out to make gasoline for summer. So, that's pushed up gasoline inventories a good deal since early May. However, we're still; below the 5-year average and demand typically picks up through the July 4th week/weekend as summer driving season really gets underway. VLO basically held support at $150 and I still think we see an improvement in crack spreads and the refiners into the fourth quarter.

Victor

4:40

Elliott, USO has increased over 17% in the month of June. We continue to see many geopolitical issues around the world. Some analysts indicate that the proxy war that could start between Israel and Lebanon is the reason for prices going up. What is your outlook on oil prices in the coming months?

Elliott Gue

4:40

Speculators built up a sizable bearish position in Brent in late May and into early June, right around the time of the OPEC meeting. Oil looked to be breaking down technically, but quickly reversed, leaving a lot of these bears caught on the wrong side of the trend -- they've covered those positions, which I believe is the main driver of the rally we've seen.

I think the fundamentals for oil support range-bound trading near term. For WTI I think that's high $70s to high $80s.

Ultimately I'd expect oil to break higher from that range, but I think we need to see signs of further tightening in the global market -- I continue to watch for upside in crack spreads and/or further backwardation in the futures curve.

I have never found geopolitics to be a useful guide for trading oil -- geopolitical rallies tend to get faded quickly. So, I think you could see some headline-driven spikes but I don't see that driving price.

Victor

4:45

Elliott, CCJ has been trending down for most of June. Do you see this trend to continue? What is your target on CCJ by the end of this year?

Elliott Gue

4:45

Uranium and CCJ have had a huge run -- CCJ is up 75%+ over the past year alone. SO, at this time I see it as just a consolidation following some huge gains rather than the start of something more sinister. The fundamental story remains intact. The last uranium bull market ended in a huge bubble-like advance in the junior miners and that hasn't happened yet -- I think there's more gas in the tank.

das555

5:13

The trouble with most bond portfolios is that the dividends are not qualified and ordinary income tax rates apply. For some investors this substantially limits their utility. How do you feel about municipal bond ETFs and CEFs. Many municipal bond CEFs are trading at significant discounts today, and paying 5% plus tax free distributions. The NAV of these CEFs would reasonably be expected to increase when the fed starts dropping rates leading to possible capital gains.

Elliott Gue

5:13

Bond interest is taxed at ordinary rates. However, there are several exceptions. For example, in Smart Bonds we have exposure to Preferred Stock ETFs; most preferred stock dividends are taxed at qualified dividend rates.

Some preferred ETFs hold a mix of preferred stocks and preferred-like bonds, so a portion of the distro is taxed at ordinary rates and a portion at qualified rates. We're finding opportunities in these markets with yields well above 6%.

We also recommend a specialized ETF that uses a strategy called a "Box Spread" to create a synthetic T-Bill yield. This ETF doesn't pay out monthly distributions like most bond ETFs; rather the "yield" is factored into the price of the ETF itself. That means that if you hold the ETF and sell it after a year you can get long-term capital gains tax treatment.

Further, of course, when you buy a bond ETF and rates drop, the value of that bond ETF will rise. So, even with a straight bond ETF, we'd expect a significant portion of your profit

Elliott Gue

5:13

to come from capital gains rather than just monthly distributions. Of course, municipal bonds can offer tax advantages as well and muni ETFs/CEFs are part of our coverage universe in Smart Bonds -- certainly something we'd consider adding to the model portfolio in future. One thing that does bother me about some of the Muni CEFs out there is that they employ leverage to pump up the yields -- with leverage comes risk of course (just look at the big negative returns in these CEFs in 2008 and 2022 as an example). Last point is that the big advantage of bonds is that they offer stability of income and capital preservation -- yes, you will pay higher tax rates on a portion of your returns if you hold them in a taxable account. However, for most investors high yields with sleep-easy returns means that bonds have a place in their portfolios.

Dan

5:15

Hi Roger, with respect to CTRI (Centuri Holdings) stock price was beaten up badly today, is the issue that the CEO has left or is there something else going on? Would this be a good entry price for the Southwest Gas spinoff? Thanks for your thoughts.

Roger Conrad

5:15

Hi Dan. The tendency when a CEO is seen departing at a key time is to assume the worst. And in this case, that would be that something is going wrong at Centuri that's diminished its future value.

The company isn't expected to report earnings until mid-August. But there are three things we do know already. First, the Centuri spinoff into a separate company is done. Southwest Gas still owns 80.96% of the company. But the task of separation is over. Second, the CEO job at American Electric Power--a $47 billion market cap company--is on a whole different level than running Centuri with a market cap less than $2 bil. Bottom line: Outgoing CEO Bill Fehrman would have been crazy not to take it. And third, the leadership team is still first rate--with a former CEO a Berkshire Hathaway utility named the new CEO and Fehrman actually staying on until there's a "permanent" CEO.

The stock did stabilize this afternoon as these details became known. As far as buying it, my preferred way would still be Southwest Gas.

Victor

5:17

On your last EIA report you indicated that Diamondback, is still on track to acquire Endeavor Energy Resources later this year, Do you see more upside potential if this happens?

Roger Conrad

5:17

Yes. The key will be what happens with oil prices. But Diamondback continues to add production scale, which cuts costs. And the stock is a buy up to 200.

Victor

5:18

OXY has good cash flow and Buffett is a large shareholder but the stock has been stuck in a range for a long time. What is your opinion on this one. Thanks.

Elliott Gue

5:18

We like OXY long-term. For a while the stock lacked upside catalysts though we think their acquisition of a private producer (CrownRock) could change that. Market will want to see them pay down the debt they took on to make the deal, but I think their cash flow as they integrate these new assets could be impressive.

Kerry T

5:21

Hi Roger:

NFE has been making new 52 week lows almost daily. Still OK?

Roger Conrad

5:21

Hi Kerry. I answered a question at length about New Fortress earlier in the chat. I think the company's investment plan is on track and that it will weather the current turmoil in the global LNG market. I think the Mexico political risk is less than what's being priced into the stock. And I expect steady Q2 results--including news that the Mexican floating LNG facility is indeed producing--when they're announced in early August. The yield is low and I like the EIA portfolio midstreams better. But NFE is still a buy up to 35--tracked in our MLPs and Midstream coverage universe.

Jeff

5:28

I listened to the Bond chat. One of the funds you liked were TLTW. How does it generate such a high yield and what makes it move up or down?

Elliott Gue

5:28

At its heart, TLTW just owns units of the iShares 20+ Year Treasury Bond ETF (Symbol: TLT). So, TLT just owns long-term Treasury bonds -- maturities of 20 to 30 years.

Right now 20 and 30-year US gov't bonds offer a yield either side of 4.5%. Their price is sensitive to prevailing rates -- i.e. if the Fed were to start cutting rates into 2025, we'd expect TLT to rise in value.

The difference with TLTW is that it also sells call options on TLT each month -- selling calls generates additional premium income, which is why TLTW offers such a high yield.

Covered call strategies are best when the underlying asset trades sideways. So, near-term we think TLT is likely to remain range-bound and TLTW will offer investors superior yields in such an environment.

If TLT falls significantly, TLTW would lose money, but likely less than TLT. That's because income from selling calls offsets some of the losses in TLT.

And if TLT rallies a lot, TLTW will underperform. However, we don't see long-term rates falling

Elliott Gue

5:28

significantly (TLT rallying a lot) from current levels until there's signs of further weakening in the economy and a more significant Fed rate cut cycle comes into view. I am planning a more detailed look at this ETF as a free article for the Smart Bonds Substack right here: https://smartbonds.substack.com/

Victor

5:56

WES has been trading above the buy price of $35 and it's in a solid uptrend. Is there any reason why this one is not in the actively managed portfolio?

Roger Conrad

5:56

The Actively Managed portfolio holds a mix of energy stocks up and down the energy value chain--so we can't own every midstream company we like. As you point out, Western has been a buy recommendation in the Energy and Income Advisor MLPs and Midstream coverage universe for some time--and well before management surprised and pleased so many by raising the quarterly dividend to 87.5 cents from the previous rate of 57.5 cents. The midstream infrastructure is in demand. The Meritage acquisition was a coup. And I think we can look forward to mid-single digit percentage dividend growth going forward. If I had two reasons for caution now it would be the run-up we've seen recently--midstream stock moves tend to be deliberate and over time--and the fact Occidental Petroleum still owns 48.79% of the stock and is the company's biggest customer by virtue of the Andarko merger. That company's main objectives have been reducing debt and leveling off production--neither of which are necessarily in Western's interest.

Roger Conrad

5:57

I think a sale of Occidental's interest in Western is possible--and while logically that should be at the best possible price, it does add an element of uncertainty not unlike Marathon Petroleum's heavy ownership does for MPLX LP--which is why we don't advise paying more than 40 for MPLX.

BKNC

6:04

I was wondering what your thoughts are on WPC? I do realize it will probably not do too much until the fed lowers rates but is now a good time to get in. I was also wondering your latest thought on BCE. Thank you.

Roger Conrad

6:04

I think WP Carey has greatly strengthened its business by substantially unloading its office properties and paying down debt. The dividend--cut last year to reflect the NLOP spinoff--is back rising again. Investment appears to be on track to meet management's $1.5-$2 bil annual target. I expect solid Q2 results that will provide a lift for the stock, though REITs in general are likely going to lag until there is a Fed pivot--as I've written in the REIT Sheet.

BCE shares have been under pressure this year from concerns wireless competition in Canada will undermine revenue and margins. Quebecor has been serious about using wireless spectrum acquired from Rogers/Shaw as a condition of their merger. But that said, Q1 results were in line with guidance and there's every sign Q2 numbers released Aug 1 will be as well. The stock is now priced for zero dividend growth, despite an increase earlier this year. I think it's cheap and intend to stick with it.

Roger Conrad

6:06

Well that looks like all we have this month. Thank you everyone for participating! As we said at the outset, we will be emailing you a link to the transcript of the complete Q&A tomorrow morning. And the transcript will also be posted on the CUI and EIA websites, as are transcripts of all of our previous chats.

6:07

If for some reason your question was not answered fully, please send it again to service@capitalisttimes.com and we will reply as soon as we can comprehensively and concisely.

BKNC

6:08

Thank you Roger.

Roger Conrad

6:08

Thank you for being with us today!

Roger Conrad

6:08

We'd also like the take the opportunity to wish everyone a very happy 4th of July holiday next week. We do appreciate your business and look forward to chatting with you next time, if not before.

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