JotCast | July 2023 Capitalist Times Live Chat

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July 2023 Capitalist Times Live Chat

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Elliott Gue

4:09

2 to 3 months is probably a technical issue -- charts more than fundamentals. I see support at the low to mid $50s and resistance is around $60 to $62.50 (the latter former support from 2018).

Longer term, SLB's margin trends are impressive and on track to exceed the last big upcycle in 2009 to 2014. They have far, far less exposure to shale -- an area that could be challenged well into 2024 -- than they did in the last cycle and than their biggest competitor (HAL) does right now.

Based on the duration of this cycle in my view, I really don't think it's difficult to support a valuation of $90+ for the stock over the next 2 to 3 years.

Victor

4:16

Hi Roger, NEP seems to be out of favor. Is it fair to say that it’s holding support around $56? Would you add more now to an existing position? According to MorningStar the fair value of this stock is more than $72. Do you agree with that? Thanks.

Roger Conrad

4:16

It's fair to say that the NextEra Energy family has attracted more than a usual number of skeptics recently, and that many of them are focused right now on its yieldco vehicle NextEra Energy Partners. I've written before that the bear case is NEP won't be able to continue to meet dividend growth guidance of 12-15% a year, either because of a lack of contracted renewable energy generation assets to buy and/or inability to finance purchases. I think both are basically at the discretion of parent NEE, for which NEP is basically a funding vehicle. And I see no evidence their support is waning--it's been very consistent since NEP's IPO in June 2014. And while weaker wind conditions hurt NEP's Q2 results, there's every indication it will meet cash flow guidance needed to sustain dividend increases. I don't believe it's ever a good idea to load up on a single stock. But ultimately, a bet against NEP is a bet against NEE. And while renewable energy stocks have lagged really since early 2021, NEE/NEP

Roger Conrad

4:17

continuing on Victor's question--they've continued to grow and become more valuable as businesses. I think both are going a lot higher. But in the meantime, there's not a lot of stocks yielding 6.3% that are growing dividends at a double digit rate--as NEP just announced again this week.

Wesley M

4:18

I’ve had some good gains since I bought Marathon Oil (MRO). Do you think it will stay on an upward path, or perhaps it’s time to take some off the table? Thank you.

Elliott Gue

4:18

We like MRO; in fact, we profiled the stock about 2 to 3 months ago in EIA. I think the big story for them is that they have a natural gas project in Africa that is currently suffering under an unfavorable contract that ties gas sales to US natgas prices rather than (much) higher LNG. That contract expires end of the year and I think that could be a catalyst.

One reason we did not add MRO to the model portfolio -- but did add HES which we profiled in the same issue if memory serves -- is that I don't think the MRO story is as "clean" as for some of the other stocks we like. The catalyst I just outlined just isn't as solid as for a name like HES.

So, we like MRO and it's a good longer-term name. I just think there's more upside in other names right now.

Arthur

4:26

What is your take on Comcast for the long term? I have happily held the stock years. The last 1.5 years were a bit ugly, but the stock has been on recent tear. Are you comfortable with CMSA viability for the foreseeable future? thanks

Roger Conrad

4:26

Hi Arthur. I think Comcast Corp has a lot of levers to pull to maintain a high level of free cash flow. And so long as that's the case, the dividend will continue to increase and the balance sheet will stay investment grade. Q2 results viewed through that prism were reasonably solid. But it does seem pretty clear that each of their core businesses is facing increasing challenges. The most worrisome is "connectivity and platforms," which is basically the legacy cable television business, broadband and wireless communications--which it offers via an MVNO leasing agreement with Verizon's network. Mainly, residential revenue dropped by -0.4% as the company shed customers faster than it was able to raise rates. Cable was down -12.6%, no surprise but customers are cutting the cord at an accelerating pace. And the company lost broadband users, who went to fiber offered by telecoms. Only a 30% boost in wireless users prevented a sharper decline in customers and revenue. But again, these customers are essentially

Elliott Gue

4:26

we reach that tipping point for the economy. Earlier in the chat a reader mentioned Mike Wilson, a prominent bear, who capitulated this year. I also found it interesting Fed Chair Powell mentioned the Fed's staff economists are no longer forecasting a recession. There's a tendency for bears to capitulate near the highs of a bull market -- I've seen it several times in my career and so I can't dismiss that outright.

Terry

4:26

Elliott, what is your current view on the likelihood of a reccession?

Elliott Gue

4:26

In my view it's a matter of "when" not "if." Right now, the market is focused on a lot of lagging indicators (like today's GDP), BLS payrolls numbers and retail sales.

But, the truth is that this isn't actually that unusual -- I remember back in 2000 when a lot of people were talking up the economic data saying there's no way the US would enter recession. Same thing, including comments for the Fed, back in 2007 and early 2008.

It's kind of like that character in Hemingway's "The Sun Also Rises" who is asked how he went bankrupt and replies "Gradually, then suddenly." Things often look OK and then there's a sudden tipping point.

Also complicating matters is that the stock market is often quite strong right up until the economy breaks into recession. That happened in 1999-2000 and also 2006-07. So, my attitude remains to play the upside in the stock market where we can find it -- particularly in groups like energy already cheap and pricing a lot of bad news -- but keep an eye peeled for when

Roger Conrad

4:28

Continuing with Arthur-Verizon customers, with Comcast marketing their service for a cut of revenue. Bottom line: It will take a lot to bring Comcast down. But it too is losing ground to the Big 3 of AT&T, Verizon and T-Mobile US. And barring a lot more success for streaming service Peacock, I think it's going to get a lot harder to hold onto customers and revenue.

Buddy

4:33

Roger, Regarding TRP, I know the stock's dividends are subject to Canadian withholding tax if held in a taxable account by a U.S. citizen. Can the tax be avoided if it is held in a IRA? Thanks.

Roger Conrad

4:33

Hi Buddy. That's been the rule under the tax treaty--the US government doesn't withhold dividends paid to Canadians' retirement accounts and Canada does the same for US retirement accounts. So there should be no withholding of TRP dividends from Canada.

Unfortunately, I continue to hear from readers that a number of big US brokerages do withhold as much as 25% of dividends paid by Canadian companies to US investors, both within and without IRAs. That seems to be based on an extremely conservative reading of the rules--not surprising for large organizations whose primary objective is not to spend time on this sort of thing. Bottom line--you may have to fight to get the exemption.

Sohel

4:37

Hi Elliot, Joined later, wanted to get my question in before chat ends. Apologize if its a repeat. Jobs and travel are strong. What's your outlook on the recession - how deep you think it will be and when is it likely?

Elliott Gue

4:37

There are some unique features to the current cycle.

Among those is that the COVID lockdown and stimulus "policy" of 2020 handed consumers trillions of dollars in cash (literally) and also shifted spending patterns away from services (like travel) in favor of stuff (goods). This snarled global supply chains for goods and helped spark inflation.

As the global economy came out of lockdown (at varying speeds) we found there's pent up demand for services and probably a retrenchment or payback on the goods front. That's what you're seeing now -- and I think that's why services spending looks decent for now.

Jobs always lag -- seasonal adjustments have further distorted that since historic patterns have been upended by the COVID response. Usually, though, payrolls only really turn negative after the economy is in recession and when that happens BLS usually does major revisions to prior data.

SO, I still think there will be a recession. The timing of that is tough but I am watching the yield curve closely --

Elliott Gue

4:37

when it moves from inverted to regain a positive slope recession will be imminent. None of this means the market can't go higher -- in fact I think you'll see continued "catch up" from laggard groups into Q3/Q4; however, I definitely have one eye trained on the economy, because in my view it's weaker than the consensus believes.

Victor

4:39

PAGP will be announcing next week. What is your outlook on this one?

Roger Conrad

4:39

Plains GP Holdings' (NYSE: PAGP) sole source of earnings to pay dividends is its ownership stake in Plains All-America Pipeline LP (NYSE: PAA). I expect a solid result for Q2 building on what we saw in Q1. The pipeline and midstream company in recent years has focused on the Permian Basin--and that once again promises to be the prime area of oil production activity in the US, with Chevron already announcing 11% year over year output growth in the region. Plains is highly volumes dependent system wide, meaning cash flow rises with throughput. And while I don't expect big increases, I think we'll see enough for the company to fund its dividend comfortably and make more progress cutting debt. We've had a highest recommended entry point of 26.50 on PAGP for a while. But I think by the end of the cycle, we'll at least see something close to the previous cycle's peak, which was over $60. Good infrastructure is in short supply. And midstream companies tend to move last in the cycle.

BKNC

4:43

I have seen your comments about TRP. It has been getting hit quite a bit regardless of the positives. Do you believe now is a good time to add to that position or better to wait? I know they will be commenting tomorrow, but what should we look for as a go ahead to add after their announcements?

Roger Conrad

4:43

The safer move would be to wait and see what they report for Q2, and whether there's any change in guidance now that the planned asset sales are in place--and depending on progress at the Coastal GasLink project as well as dealing with the Virginia pipeline fire. I think the most we'd see immediately on particularly good news would be a jump back to the high 30s. But the primary appeal of this stock to me is it's a dominant company that's still executing on asset expansion despite some challenges currently--and it's headed a lot higher as this energy upcycle unfolds. Also, the fact its priced in Canadian dollars should also be a big plus down the road, as that currency historically has gained on the USD in energy upcycles.

Fred

4:47

Hi Roger,What is your latest outlook and suggested Buy price for PXD?

Roger Conrad

4:47

We like Pioneer Natural Resources (NYSE: PXD). It's the leading independent producer in one of the world's hottest oil drilling regions (the Permian). And they share the wealth with investors by virtue of a a variable rate dividend that basically rises when oil and gas prices do. It's a buy up to 230. And like all high quality E&Ps, we see it going a lot higher by the end of this upcycle.

Fred

4:47

Thanks for your consistently great advice.

Roger Conrad

4:47

Thank you Fred.

Mike C.

4:48

Finally, and this may be a question more suitable for one of Elliott’s weekly options or CT Trader deep explainers, I would love to get your take on a note that came out from Bloomberg (“Fed policy may not be as tight as you thought”, in the 7/25 Five Things to Start Your Day), which noted that:

“…the Fed is also busy fighting itself. Its $8.3 trillion balance sheet acts to hold yields down even as rate hikes act to lift them. Consider a recent Fed research paper, which estimated that $2.5 trillion of balance-sheet reduction over the space of a year would be equal to an extra half-point of rate hikes. Reverse engineering that calculation — adjusting for a balance-sheet floor of $1 trillion to return it to pre-2008 levels — could be taken to signal the current impact of the Fed funds target is the same as if it stood at 3.8% rather than 5.25% for the upper bound. That dynamic may help to explain some of the Fed’s frustration at the economy’s resilience. It also underscores the potential the central bank will

It also underscores the potential the central bank will hike rates further than most expect and hold them there for longer.”

My question here is…if this is true, doesn’t this imply a greater delay in the arrival of a recession, more stock market upside sooner, a much longer path of interest rate rises, and (probably) a return of increased inflationary forces (wages, energy) much sooner? It seems like, if true, this is a pretty significant disconnect within the Fed, with tangible predictable impacts for investors and traders.

As always, thanks for all of the great work!

Elliott Gue

4:48

I saw that piece and I think there's truth to it. Economists often talk about it, but no one really ever knows what the "neutral" interest rate is (R-star). It's quite possible it's higher than the market thinks it is. And I do believe -- still believe -- the inflation beast has yet to be slain.

It's interesting to me that the 10-Year Breakeven inflation rate as well as the 5year5year forward rate recently soared. For the 10-year we're back to levels we saw in February and that long-term 5y5Y forward rate recently broke to a new 52-week high.

Oil is breaking higher too and, certainly, not enough has changed on the non-OPEC supply front to forestall a bigger rally in crude if demand holds up.

At the same time, there have been calls from some corners for the Fed to raise it's inflation target to 3%. I wonder if the Fed realizes that it's not going to be easy to get back to 2% without engineering a recession.

Elliott Gue

4:48

Historically, however, inflation depresses valuations and the stock market as a whole is very dependent on 7 stocks trading at very high valuations for most of its current altitude. In short, this scenario is basically what happened in 1970-75. In retrospect, the Fed has admitted that it underestimated the neutral; rate of interest and, therefore, kept rates too low for too long and sparked resurgent inflation. This was bad news for growth stocks, the market did OK in nominal terms (real terms not so much) but commodities and value groups like energy had a pretty solid decade.

Arthur

4:51

Do you have a couple of MLPs that you think are better values and/or have better long-term prospects than then their peers at this time? Thanks.

Roger Conrad

4:51

This is always a tough question to answer just in advance of Q2 earnings and guidance updates. But I stand by my "top pick" recommendation of Energy Transfer LP (NYSE: ET) that I made in Energy and Income Advisor at the beginning of the year. The year to date return is good at 16%. But I'm really most impressed with the way management followed through on plans to restore the pre-pandemic dividend rate as well as debt reduction efforts that are leading to credit rating upgrades in the next 12 months. The Lotus Midstream acquisition won't be the last. It's a buy up to 15--and it yields 9.4%, just increased this week. I would also refer you back to the question I just answered on Plains--a little more aggressive than ET perhaps but deeply discounted to its peak price of the previous cycle and a big Permian beneficiary.

Sohel

4:54

Hi Elliot, Thanks for responding to my question about the recession. Could you also take a crack at how deep you think the recession will be?

Elliott Gue

4:54

It's too early to say in my view. Consumers have significant excess savings which should cushion downside. However, the yield curve is so dramatically inverted that usually correlates with a more severe downturn. My guess is that it will be a mild-to-average recession, but the coming inflationary growth period will bring significant economic volatility and will be tough sledding for stocks.

Bill

4:56

Atlantic Sustainable: What would be a reasonable per share price for AQN's stake or the whole thing? Are we at risk of a take under?

Roger Conrad

4:56

Hi Bill. I guess the takeunder possibility is pretty much on everyone's mind these days for Atlantica. Obviously, the most advantageous thing for Algonquin is if it can sell its 42.15% interest in one go. And such a stake would likely be more attractive if there were a concurrent deal to buy the whole thing, considering the current market cap is less than $3 bil and trades at 5.7 times annual cash flow. On the other hand, Algonquin doesn't have a majority stake, so any deal like that would have to be negotiated with Atlantica's board and major shareholders. I've said before I think a sale would be bullish for both AQN and AY--a partial sale should mean a more supportive owner. And any cash deal would have to be at least in the high 20s I think to succeed. In any case, I think we will see the result of the strategic review this fall at the latest. And the current price isn't really pricing in much optimism--either for AY or AQN.

Jimmy

5:01

In the Creating Wealth portfolio, is there/what is the plan for closing out SARK, SH, BITI?

Elliott Gue

5:01

SARK and BITI are very small positions. I chose small positions there because both track extremely volatile assets, so I wanted to give them some "room" to work for us. Bitcoin hasn't been able to sustain a rally over $31 -$32,000, but if it does I'll likely recommend taking the loss there. ARKK I am watching the mid-July pivot around $50 -- if we break above that I'd also recommend bailing on that one.

SH -- the S&P 500 -- is a slightly larger position. I have been waiting for a pullback to likely exit that. Given how overbought the S&P 500 is and the lack of upside today off pretty good economic news, I think we'll get a pullback to be able to exit.

A very important part of risk management in CW is position sizing. Last year I got more aggressive with the inverse ETFs in terms of sizing up positions because the market trended lower, supporting the fundamental bearish view on bitcoin, Arkk, the S&P and the Nasdaq. This year it hasn't, so I've kept the positions much smaller.

Elliott Gue

5:08

EQNR, like BP< has pushed back a little more CAPEX into oil/gas. That makes sense to me in light of Europe's energy crisis. Obviously, Norway is a big supplier of European energy that's more reliable than, for example, Russia.

Dayton A.

5:08

Good morning Elliott and Roger,

I subscribe to both CW & EIA and closely follow Elliott's recommendations for inverse fund shorts and for ETF longs and some stock purchases. I say "some" because I sometimes replace stock purchase recommendations on CW with stocks that seem strongly supported on EIA, such as Hess (surprisingly recommended over XOM after seeing many comments extolling the virtues of XOM) and ET. I've also taken a flyer or two on energy majors who are moving more quickly into green energy, such as EQNR, who appear to have very low PE ratio's. In the case of EQNR, its only 20 shares based on discoveries of grafite in Norway. I did call this a flyer, didn't I! And, I bought SWN to beef up my exposure to NG. Am I getting too far off the reservation in your opinion? Am I having too much fun? My results are running very close to the CW Portfolio, maybe a bit better due to concentration in the energy sector; which has overperformed. (cont.)

Elliott Gue

5:08

While I still like XOM -- it's my favorite major -- it has been hanging above my buy target for many months now. The reason I opted for HES in CW is that I felt it offered better value/risk reward but was also a plan on that same jewel of an asset in Guyana.

Generally, I don't think any of the names you mentioned are bad stocks to own. I like SWN -- in fact we have it as a trade in our trading service -- ET is a good name and I think EQNR is OK.

I don't have a problem with oil companies pushing a little bit on the alternative energy side. What I do have a problem with is two things:

If they ignore the crucial upstream investment because they divert too much capital to alternatives.
If they invest in low return alternative projects. I mean, I generally prefer companies to "stick to their knitting" -- to do what they know how to do which is to find oil/gas and refined it into chemicals, gasoline and diesel.

My sense is EQNR hasn't gotten too far over its skis on the alternative energy front and lately

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