Profit During Geopolitical & Supply Concerns

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Two big topics seem to be on EVERY investor’s mind these days: Interest rates and energy. They want to know if inflation has tailed off enough to keep the Federal Reserve on the sidelines for the rest of 2023. And they want to know if energy prices will keep rising due to geopolitics and supply concerns. Moreover, they want to know how to best protect themselves – and profit – as those issues get sorted out. Here are what several top MoneyShow contributing experts have to say about rates and energy…and what to do given the current backdrop.

Kenny Polcari SlateStone Wealth

Bostic says policy is “restrictive enough.” Vice Chair Philly Jefferson said that we are in a “position to proceed carefully.” Lorie Logan adds that higher yields may mean less need for the Fed to raise rates again. And Minneapolis Fed Pres Kashkari is perplexed on why Treasury rates are rising now, saying “it’s hard to know…but it’s possible that the government is issuing a lot of debt.” (Do you think?)

More supply puts downward pressure on prices and in the bond market, that means yields must go up. He offered another lesson, too – maybe it’s just that the US economy is strong and we can expect higher growth for the next 10 years so higher rates reflect that analysis.

S&P 500

Recall earlier this week I told you that Neely has been calling for a 6% terminal rate – along with Loretta Mester. If he changes his tune, then that would be a notable change and it kind of sounds like he is changing his tune. Fed Governor Chris Waller said that they will stay on the job to get inflation to 2%, but also did not commit to a move on November 1.

Fed Governor Mishy Bowman was a bit clearer. She thinks that the Fed needs to hike rates further, telling Bloomberg.com that “despite recent improvements, inflation remains well above the FOMC’s 2% target. Domestic spending remains strong, and the labor market remains tight.”

So, in the end, it sounds like three of them are committing to no hike and the other two are playing on both sides of the fence. This way they can point to their comments and say, “See, I told you.’ And one of them is firmly calling for higher rates.

Me? I still think that they need to hold rates higher for longer and I think they have made that clear. But I guess that narrative could change if the plot thickens – and the plot appears to be thickening. Not with economic issues as much as geopolitical issues. And while those issues don’t usually price stocks in the long run, they do provide chaos in the short run.

The S&P recently closed at 4,358 and there is a real possibility that we kiss and test trendline resistance at 4385. A quick look at the chart reveals that the intermediate resistance and short-term resistance are about to cross, with the short-term resistance slicing down through (not up through). That will cause some consternation for the markets as it struggles with what to do next.

If we push through, then we could see the S&P advance, testing levels seen in late August. Think 4,500-ish. Which, again, only supports my point as a long-term investor. Stick to your plan. Don’t try to pick tops and bottoms. Build a strong, diversified portfolio.

Alec Young Mapsignals.com

We are reaching the point where we to disregard the rate scare and buy stocks now. In late July, we initiated our pullback narrative when our Big Money Index (BMI) peaked at a scorching 83.9. Stocks never do well in the short term when the BMI gets that hot. Fast forward two months and the S&P 500 is down 8% from its summer peak. Relative strength in tech and energy, our top-ranked sectors, has helped limit market downside.

Our two least favored sectors, utilities, and real estate, have corrected more than twice as much as the S&P. It’s been a tough stretch. The good news is stocks are fast approaching deeply oversold levels. A major tactical buying opportunity looms. Today, we’ll recap what’s driving this sell-off. Then we’ll use the Big Money Index (BMI) to show you when to buy stocks and which sectors to lean into.

Tightening Financial Conditions Spark Panic Selling

You don’t need me to tell you Wall Street’s worry list is a mile long right now. Whether it’s surging interest rates, sticky inflation, oil prices, a strong dollar, lofty valuations, or widening credit spreads, there’s no shortage of bearishness spooking investors these days. All these macro boogeymen have one thing in common—they tighten financial conditions.

Here’s why that matters. Pros are increasingly worried tighter financial conditions will spark a nasty, profit-killing recession. As the cost of capital has surged recently, the big money has rushed for the exits, kicking the sell-off into high gear. Check out this chart. The Goldman Sachs US Financial Conditions Index rolls up all these spooky macro inputs into a single indicator. Notice how the S&P 500 started falling more sharply as Goldman’s index began spiking in mid-September:

OK. Now you’re probably wondering how all this can help you make money. Read on.

Disregard the Rate Scare and Buy Stocks Now

Stocks and bonds have both been hammered. Institutional investors are starting to panic. The fear in the market is palpable. Times like this may not be much fun, but if you follow MAPsignals, you know volatility creates opportunity! I could have picked any of the 10 widely followed sentiment indicators to show how bearish investors are. They all tell the same story. Investor sentiment sucks. People are scared. Check out the widely watched American Association of Individual Investors (AAII) weekly sentiment poll. The pros watch the bulls minus bears spread. Most of the time bulls outnumber bears by a wide margin. Negative readings mean there are more bears than bulls. The latest reading is -11.5%, way below the +6.5% 40-year average:

Remember, it’s always darkest before dawn. Check out this next chart. It pays to buy when you see extreme bearishness all around you. Historically, the S&P 500 has posted above-average 6% returns in the six-month periods following bottom quartile bullish sentiment readings like October 5th’s 30% reading: OK let’s dig deeper to see if we’re getting the same bullish message from MAPsignals’ Big Money Index.

The BMI is a fantastic timing tool. Readings under 30 are rare and indicate stocks are nearing oversold levels. Said in plain English, it’s time to buy. Conversely, readings over 80 mean stocks are overbought and traders should lighten up. The BMI rightly told you to buy stocks last October at the bear market bottom when it went oversold at 25. Then it told you to buy the dip in March when it tanked to 29. Then it nailed the July peak when it said to sell stocks as it went overbought at 84.

Let’s face it, the BMI has an amazing batting average! The BMI just slumped down to the mid-20s. It’s telling you stocks are oversold. It’s time to buy!

How to Play It

The best move when the BMI goes oversold is to buy stocks aggressively. THAT you buy is more important than what you buy. Rips off oversold BMI levels tend to be very powerful and last for months. We expect a rising tide to lift most boats. Again, disregard the rate scare and buy stocks now. If all you do is buy an S&P 500 ETF like Vanguard S&P 500 ETF (VOO
VOO
) you’ll do fine (VOO’s ER is 1/3 the price of SPY
PY

SPY
).

But if you want to do even better, check out MAPsignals’ top-ranked sectors – energy and technology. See how they tower in our sector rankings. Note that while both have been outperforming nicely, neither is overbought. Recent panicky profit-taking amid all the macro handwringing means you can buy energy and tech winners on sale.

Meet the S&P 500’s Cash Kings

We’ve talked a lot about what’s driving big money buying in tech and energy all year. Here’s a fresh angle. As rates rise, the huge cash hoards on the books of mega-cap tech and big oil are increasingly attracting institutional flows. That’s because their hefty corporate cash is earning 5.5% in T-bills. High-yielding cash acts as a healthy shock absorber that can cushion earnings if macro uncertainty ultimately winds up denting profits.

Think of cash as an insurance policy in uncertain times. Let’s dig deeper. Check this out. 13 huge tech and oil names are collectively sitting on $807B. That’s 30% of the $2.6T in total cash held by all 500 S&P companies. They’ll earn roughly $42B on that money over the next 12 months! Apple (AAPL), Google (GOOGL), and Microsoft (MSFT) alone own a combined $477B! That’s 17% of all S&P 500 cash concentrated in just 3 mega-cap tech names.

As for big oil, Exxon (XOM) and Chevron (CVX
CVX
), who together comprise 45% of the S&P 500 energy sector’s market cap, have a combined $125B on their books. Compare that to the relatively paltry $5.2B held by the average S&P 500 company and you can see how huge, high-yielding cash piles can help the S&P’s cash kings outperform in a murky macro environment.

On the flip side, MAPsignals’ lowest-ranked sectors, real estate and utilities are still lagging badly. Bond proxies with high dividend yields like utilities and real estate have been hit hardest as rising, risk-free 5% bond yields make their 4% payouts significantly less attractive. Plus, high rates increase their financing costs, a headwind to profit growth.

Defensive, counter-cyclical sectors like staples and health care have also underperformed as the economy continues to dodge recession. Their relatively high dividend yields are also undermined by rising rates. The good news is all these lagging sectors are super-oversold and ripe to rebound when the market turns up soon. That said, we think higher beta, cyclicals like tech and energy offer the best bang for your buck.

Bringing It All Together

Stocks are being marked down as investors worry tightening financial conditions will make weaker economic and earnings growth inevitable moving forward. But here’s what the bears miss. All the negativity that’s been mounting for weeks is finally driving panic selling. That’s why the BMI is waving the green flag. That means all the doom and gloom is already priced into depressed stock prices. Everyone who wants to sell already has.

Historically, the S&P 500 has posted above-average 6% returns in the six-month periods following bottom quartile bullish sentiment readings like October 5th’s 30% reading. So, there you have it. The macro doom and gloom is already baked in the cake and an oversold BMI agrees! That’s a powerful one, two-punch! Don’t fear the doom loop. Buy into it!

Elliott Gue Energy and Income Advisor

NGLs is a catch-all term for a long list of hydrocarbons found naturally in the raw natural gas stream produced from wells in certain regions of the US. Specifically, natural gas is really methane – CH4 – a carbon atom bonded to 4 hydrogen atoms.

The two most common NGLs are ethane (C2H6) and propane (C3H8), which combined typically account for around three-quarters of a mixed barrel of NGLs by volume produced. Generally, raw natural gas is processed to separate NGLs from methane. Then, NGLs can be fractionated to separate a mixed barrel of NGLs into volumes of ethane, propane, butane, and other hydrocarbons.

EQT Corp. (EQT)

Many of the oil- and gas-focused exploration and production companies in our coverage universe have some exposure to NGLs output and will benefit from a healthier supply/demand balance in coming years. In Energy & Income Advisor, we’ve generally preferred to focus on gas-focused producers with exposure to two major gas shale fields, the Marcellus Shale of Appalachia and the Haynesville Shale of Louisiana.

The former is the lowest cost gas-focused field in the US with breakeven costs for quality producers like EQT generally under $2.40/MMBtu. We also like the Haynesville Shale because while it’s a higher cost gas field than the Marcellus, it’s located close to the US Gulf Coast, home to most US LNG exports, reducing transport costs.

Producers also have the potential to ramp up production from the Haynesville more quickly to meet growing demand for exports, provided gas prices are at or above the $3.50/MMbtu to $4/MMBtu region that’s required for Haynesville producers to generate significant free cash flow.

While we still favor the Haynesville as a play on LNG growth and natural gas specifically, it’s almost entirely a dry gas field – gas produced in the region typically continues only tiny volumes of NGLs or oil. In contrast, the Marcellus Shale contains both wet gas and dry gas windows.

Recommended Action: Buy EQT.

Tim Melvin The 20% Letter

This firm stands as a formidable force in North America’s energy infrastructure landscape, boasting a storied history dating back to 1951. Headquartered in Calgary, Alberta, Canada, TC Energy operates a sprawling network of pipelines, power generation facilities, and energy storage assets, spanning the length and breadth of Canada, the United States, and Mexico.

At the heart of TC Energy’s operations lie three core business segments:

Natural Gas Pipelines: TC Energy commands an extensive web of natural gas pipelines, totaling approximately 93,700 kilometers (58,200 miles). This intricate system serves as the lifeblood of North America’s energy supply, efficiently transporting natural gas from production hubs to distribution centers, ensuring a consistent flow of clean energy for homes, businesses, and industries. This network taps into almost every major oil and gas basin in North America, and transports more than 25% of the continent’s daily gas demand.

Liquids Pipelines: The company’s reach extends to a robust liquids pipeline network, spanning about 4,900 kilometers (3,000 miles). This network is instrumental in ferrying crude oil, natural gas liquids (NGLs), and refined products, bolstering the region’s energy infrastructure.

Power and Storage: TC Energy diversifies its portfolio with a presence in power generation. The company operates a range of power plants, including natural gas, nuclear, and renewable energy facilities. Furthermore, TC Energy has ventured into energy storage projects, enhancing grid reliability and facilitating the integration of renewable energy sources. All in all, TC Energy produces more than 4.6 GW of power, about 70% of which comes from emissions-free nuclear energy.

This huge network of power lines, pipelines, and power generation means TC Energy is at the heart of America’s energy infrastructure – which in turn means it’s at the heart of the US economy, no matter what technologies we develop.

TC Energy’s investments extend south of the border, where the company is contributing to the development of natural gas pipelines in Mexico, bolstering the country’s burgeoning energy demands and fostering regional economic growth. The company is also actively exploring opportunities in renewable energy, including the construction of wind and solar projects.

The company also boasts an average annual shareholder return of 11% since 2000, and sports a 3% to 5% expected annual dividend growth rate.

Recommended Action: Buy TRP.

Lindsey Piegza Stifel Financial

In this interview, we explore several key economic and policy topics on the minds of investors, with Lindsey summarizing the outlook by saying: “The U.S. labor market is still very tight. Inflation is still too high. And the Fed therefore still has more work to be done.” We next discuss the recent rash of strikes and walkouts, the pace of progress on pricing pressure, and how “Chair Powell has been very clear that orange is not the new black. 3% is not the new 2” when it comes to his inflation target.

The discussion then shifts to fiscal policy, federal government debt, and why markets appear to be pricing in more risk of long-term balance sheet deterioration (even if a full-on “debt trap” is not the likeliest scenario). We also touch upon the recent Middle East conflict and how it could exacerbate energy supply and pricing concerns.

Read the full article here

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