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6/29/22 Capitalist Times Live Chat

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Guest

4:09

Hi Elliott, in one of your email market analysis, you talked about the target date funds and that “the time to act is now.” I own these target date funds in my 401K and I want to take action to preserve what is left. Can you propose the action you were referring to? I can just sell all and go into cash but been waiting for months to get a big rally. It May never come so it’s a risk.

Elliott Gue

4:09

The problem with target date funds is that essentially they're designed to increase a person's exposure to bonds, and decrease their exposure to stocks, as they age. So, the idea is that if you're 25 years old, you probably have 40 to 50 years until retirement and so you can wait out a bear market in the S&P 500. But if you're 65 and just about to retire you need the safety provided by bonds. Sounds good and for much of the past 40 years it has been a decent strategy because bonds have been in a bull market since 1982. The problem is that the bond and stock markets have been hit simultaneously this year -- S&P down almost 20% year-to-date, Investment grade corporates down 15 to 20+% in some cases, IEF (7 to 10 year Treasuries) down 11.3%, EVEN 1 to 3 year Treasuries down 3.2% and TIPS down 9%. The reason is that over much of the past 40 years, when the economy weakened, the Fed slashes rates and bonds rally. This provides a sort of ballast against stock losses. But, now we're in a period more like the 70s

Terry

4:09

…due to regulatory and or interest rate concerns.

Roger Conrad

4:09

Hi Terry. I pay a great deal of attention to regulatory developments--and being located across the river from DC in northern Virginia has certainly been an advantage over the years. Also not a bad place to observe monetary policy, and the politics that increasingly shapes it.

Elliott Gue

4:09

in my view. In the 70s stocks and bonds both lost money after adjusting for inflation. The Fed doesn't have the flexibility to cut rates when the stock market falls and the economy tips into recession without stoking inflation. So, simply put, the premise of target date funds isn't working as it has in recent decades. The e-mail you're referring to comes from one of the services I run. Basically, our focus has been on using a more active management style to address the current economic and market predicament. For example, I recommended buying multiple inverse ETFs to profit from the market decline starting in December last year. I recommended taking profits on these bearish bets in late May but am looking to "reload" our positions on any bounces. I currently recommend holding a sizable cash position in the portfolio and am being very selective about buy recommendations, generally centered around "special situations" and secular bull market stories like energy and precious metals.

Hans

4:11

Elliott, What was the reason to take RTLR from the EIA portfolio. Thanks

Elliott Gue

4:11

RTLR is being acquired by Diamondback Energy in an all-stock deal.

Roger Conrad

4:13

Hi Hans. That merger agreement basically tied Rattler's returns to Diamondback--which in turn is tied to oil and gas prices that had surged. We saw the opportunity to take a big gain.

Guest

4:15

Hey guys, I've taken a 20% hit on IIPR, do you think i should cut my losses?

Roger Conrad

4:15

As I said earlier in the chat, it's not so much their business plan or the supposed weakness of the tenants--the risks we do know and are priced in. It's what we may not know here in light of the tidal wave of shareholder suits that makes me cautious. No doubt some of these suits won't stand up in court, maybe none of them will. But I want the dust to clear a bit here before making a recommendation. As for holding on versus selling, I could see this REIT going back to $150 the next few months. But I think if you're going to hold on, you need to be prepared for the possibility it might crack $100 on the downside near term.

Alex M

4:20

Hi Roger. What are your thoughts on Simon Property Group (SPG)? Thank you.

Roger Conrad

4:20

Hi Alex. It's the only shopping mall REIT on the REIT Sheet recommended list now. It's taken a hit since recession worries started picking up and is the biggest loser on the list at this point year to date, down almost -40%. On the other hand, Simon is far less leveraged, more scaled up and cost efficient than it was prior to the pandemic. So while a recession could hurt some of its weaker tenants, the damage isn't going to even be in the same ballpark as two years ago, when malls were physically closed down. And Simon clearly plans to restore its old dividend rate of $2.10--having boosted to $1.70 a quarter this month. I think it's a good buy here slightly under $100 a share--with earnings in early August likely to show continuing business momentum.

Guest

4:22

Hi Elliot, can you give an update on your current analysis of SLB stock and the company/business? Is this downdraft just the beginning for SLB and do we have a lot lower to go?

Elliott Gue

4:22

SLB is, like pretty much any stock, somewhat leveraged to the broader market outlook. So if the S&P 500 has 30% +/- more downside (I think that's possible) then it's hard to imagine SLB not coming down a bit more. However, I think SLB is very well positioned fundamentally because it's a leader in the technologies needed to address the global shortfalls in energy supplies. I really don't think I'm exaggerating when I say that chronic undersupply of basic commodities, including oil, metals and agricultural commodities will be the most serious threat to the global economy over the next 5-10 years. The degree of underinvestment is massive and the naivete of some of the energy transition timetables out there is truly shocking. SLB is one of the best ways to benefit from this commodity supercycle and we see dips as a buying opportunity. Also, I'd say that even if these stocks come down a bit, they're likely to 1. Outperform the broader market and 2. they're unlikely to revisit their 2020 and early 2021 lows.

Jeff

4:24

I own EPD,CEQP and ENB was looking to add more midstreams. Is this a good time, if so what would be your best picks?

Roger Conrad

4:24

Hi Jeff. I think a number of midstreams are trading at good prices now, though it's possible we'll see even better entry points later this year. One to look at in addition to what you already own would be MPLX LP, yielding almost 10% and generating almost $4 bil a year in free cash flow--$500 mil plus after dividends for paying off debt and buying back stock. Also as I said, Energy Transfer looks quite cheap--at a restored quarterly dividend rate of 30.5 cents, it would yield 12%. Look for more in next month's issue of Energy and Income Advisor.

Gary

4:34

Since REITS are so sensitive to rising interest rates (rising interest rates = higher debt financing = lower asset valuations). Do you have any recommended REITS with low or NO debt?

Roger Conrad

4:34

Hi Gary. I'm not certain the record supports REIT returns as being so sensitive (negatively) to rising interest rates. Yes, rising rates raise borrowing costs needed to finance new projects. But most established REITs rely mainly on fixed rate debt, so rising rates don't impact costs or earnings. Also, one of the greatest period of property value increases in American history was during the 1960s and 70s, while interest rates and inflation were running double-digit percentage increases. Property is a hard asset and therefore rises in value the more the currency is debased by inflation.
Second, REITs are businesses. And one consequence of rising inflation and interest rates is renting becomes more attractive to buying property--which means they can raise rents. That means higher cash flow and dividends, and in fact this is what we've seen so far this year.
As for REITs with no debt, I'm not aware of any. But I don't think I'd want to own one in any case as they rely 100% on equity, not always best.

Guest

4:36

I own CLR and didn’t realize until today that it is going private. Can you propose what I should do with the shares? Put limit order to sell at $70?

Elliott Gue

4:36

It's an all-cash offer but it's non-binding. Harold Hamm, the CEO, and trusts controlled by the family own over 80% of CLR, so it already has limited free float. I admire Hamm and think he's one of the savviest people in the business and he's not been shy about his frustration with where CLR is trading. The lack of free float also limits his ability to do some shareholder friendly things like buying back stock. He hasn't pursued a variable distribution strategy either for (at least partly) the same reason. Those are the main reasons why we haven't recommended the stock in the service. Ultimately, I think going private makes sense for CLR and if Hamm wants to take it private at around the current offer price of $70, he probably can do so. It's likely to trade at a discount to that $70 offer price until the deal is finalized, so if you decide to sell early, I wouldn't be surprised if you'f have to accept a price below $70.

PeteH

4:41

Hi Conrad, Thanks for holding those chats. Very informative!. Do you have any comments on HASI as it greatly has underperformed since the market topped. I remember that in June you mentioned $30 as a better entry as it could provide some support to the stock. Is this still your view?

Roger Conrad

4:41

Hi Pete. I think Hannon Armstrong is actually a very solid value at this price. You have a 4% plus yield that management now has a clear path to grow at least 5-8% annually. The company itself is now the premier lender/investor to municipal entities and corporations for "behind the meter" energy efficiency and renewable energy projects--at a time when rising electricity and gas prices have greatly increased their appeal. It's also building a steady base of recurring income by taking ownership stakes in contracted renewable energy generation, which reduces dependence on having to find new projects to fund. And it's now rated investment grade by Moody's, with demonstrated ability to sell low cost green bonds. There seems to be some concern the company could see slower growth in a recession and with interest rates rising. And we'll see more in early August with Q2 results and guidance. But at this point, it looks like a lot of bad news is priced in and not a lot of potential growth--good time to buy low.

Guest

4:43

Hi Elliot, can you share with us your current opinion of HBM and MOS the stock and the company/business?

Elliott Gue

4:43

Both MOS and HBM are pulling back due to concerns about global economic growth and recession. Quite frankly, I think those concerns are well-founded as I've mentioned a few times on this chat. HBM is the more leveraged name and has more economic cyclicality, so I'd probably wait until the economic downturn actually gets underway for a buying opportunity. I will say that I have been looking at MOS and CF, both fertilizer plays, as possible additions to the Total Return model portfolio this summer. The outlook for fertilizer demand is actually pretty solid and likely to be more recession resistant because food demand is more inelastic). The recent pullback looks like an interesting opportunity, but I have not yet recommended "pulling the trigger" on that recommendation.

Alex M

4:48

Hi Roger. What are your general thoughts on the industrial REIT space? For example, names like PLD, REXR, TRNO, and DRE. Thank you.

Roger Conrad

4:48

Hi Alex. Industrial REITs were red hot earlier this year. Then Amazon.com announced it would try to cut back its demand for warehouses and the momentum taking Prologis and others to unsustainable valuations abruptly reversed. Ironically, as management of the industrial REITs' we cover in the REIT Sheet has pointed out, there would be little earnings impact on the group even if Amazon pulled all of its leases. And that's neither in the realm of possibility or what Amazon has said it intends. The result is, as I point out in the REIT Sheet, a buying opportunity for this group, which still has considerable earnings momentum. And there's M&A in the air as well, with Prologis and Duke Realty (NYSE: DRE) now in a merger agreement. I don't currently follow Terreno or Rexford but will look to pick up coverage in a future issue. Thank you for the suggestion.

Aaron

4:48

Roger or Elliott, with the possibility of a pending recession do floating funds still make sense?

Elliott Gue

4:48

I still recommend SRLN in the model portfolio for one of my services, an ETF that buys bank loans which carry floating rates. On a relative basis it's performed well but not so much on an absolute basis. I view it as a reasonable holding in a well-diversified portfolio and one that could see some upside in a bear market rally for the S&P 500 amid continued short-term rate hikes. I plan to play that recommendation "close to the chest" and sell if the situation deteriorates faster than I expect. I am also currently contemplating a few potential fixed income hedges for that model portfolio to protect against further downside in fixed income markets.

Mark

4:53

Roger, do you have any ideas about Arbor Realty Trust (ABR) and would you consider including it in REIT Sheet?

Roger Conrad

4:53

Hi Mark. Thank you for the suggestion. I have not added Arbor to date, mainly because I already cover a large number of financial REITs and am not very sanguine on the group in general. Arbor's rising dividend is clear evidence it's been successful maintaining a good spread between investment returns and cost of capital. What worries me is now we have an environment where cost of debt capital--as well as equity capital at a yield of 11.5%--is sharply elevated. And if we do see a recession, we will see defaults on the higher risk end of the spectrum. And that's historically been poison for this business. Again Arbor may escape and we'll see another round of earnings and guidance probably in late July. But at this point, I'm very cautious on companies in this area.

Jeff

4:57

Roger in a post above you stated you see CEQP getting to $100. Did I read that correctly?

Roger Conrad

4:57

Yes. I think the investment deficit in the oil and gas business will eventually extend this price cycle to much higher levels, both for the commodities and sector stocks. And that includes midstream players, since the infrastructure deficit is likely to widen as well. During the previous cycle, Crestwood actually traded at a reverse-split adjusted price of $210.

Mark

5:01

Hi Roger and Sheri, There were a couple of comments about separating the many pages in the quarterly report from your commentary. Most readers should be able to select the page numbers they wish to print in their "print options" before printing.

Roger Conrad

5:01

Thanks for pointing that out Mark. I just want to say we're all about doing what you guys as our readers want at Capitalist Times. Sherry and I still consider The REIT Sheet to be very much a work in progress. And we welcome any and all suggestions--including of course new REITs to cover in the quarterly databank.

Guest

5:01

Hi Elliott, on the chart that shows the first 100 days of a new bear market where price has not dropped that much, would it be reasonable at this point to conclude that this bear market has diverge from history? I was hoping that during this first 100 days, we wouldn’t drop so much and I would get chances to slowly reduce my stock exposure in my 401K at prices near the highs.

Elliott Gue

5:01

The current bear market has evolved more quickly than the 2007-09 and 2000-02 bear markets. However, a good bit of that is due to a handful of large-cap tech and growth companies and those analog years aren't too far "off." Consider that, for example, the S&P 500 peaked on January 3rd and so the end of May is roughly 100+/- trading days post peak. As of the end of May, the S&P 500 was down 13.3% year-to-date and the Nasdaq Composite was down 22.8%. The Russell 1000 Growth Index plummeted 22.2%, but the Russell 1000 value index was off less than 5%. This is not far off the pace of the last two bear markets and pretty much what we saw in some of the bear markets back in the 1970s. Generally, I think we will see the stock market bounce at some point this summer but in my view (and as I've written) there's a great deal more downside to come. Generally, I think the core market concern is in the process of shifting from rising rates to recession. As that shift happens, historically market declines have

Elliott Gue

5:01

accelerated and broadened. I continue to expect value stocks to beat growth for years to come because growth has been a bubble and usually those take approximately 10 years to heal.

Alex M

5:07

With the 2-year note yield pushing over 3%, at what point do you anticipate rising rates will start to adversely impact utility stocks? If it hits 4%+, do you still think there will be an appetite for equity risk even in a defensive space like utilities?

Roger Conrad

5:07

There really hasn't been historically a level of interest rates where utility stocks have necessarily been affected one way or the other. Consider this: From June 2004 through June 2006, the Federal Reserve boosted the Fed Funds rate from about 1% to 5.25%--and the Dow Jones Utility Average was up about 60% over that time frame, one of its best 2-year showings in history. Yes this group borrows heavily--and CAPEX is hitting records on energy transition investment, which means a lot of bond issues even without including regular refinancing. But we've also had about 20 years of derisking since the Enron meltdown changed the game. And so long as regulators are supportive of grid upgrades and renewable energy--as they are in pretty much every state now--utilities are going to earn a return on their investment. It's also noteworthy that most CAPEX projects now are of very short duration, and unlike the big nuclear projects of the 1970s, utilities recover pre-approved investment as incurred.

Robert P.

5:09

Great WebChat, appreciate your quality and commitment you provide to the private investor. Is there any speaking engagements or National conventions that will bring you out for us to be able to attend and or meet?

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