Latest / Bloomberg Intelligence / Hugh Johnson: Energy Sector Very Attractive, Likes XOM (Audio)

Transcript

Hugh Johnson: Energy Sector Very Attractive, Likes XOM (Audio) · Bloomberg Intelligence

• 0:03
  Speaker 1: Global business news twenty four hours a day. If Bloomberg
• 0:06
  Speaker 1: dot Com, the radio plus mobile act and on your radio.
• 0:09
  Speaker 1: This is a Bloomberg Business Flag from Bloomberg World Headquarters.
• 0:14
  Speaker 1: I'm Charlie Pellett. Stocks are advancing the SMP five hundred index,
• 0:18
  Speaker 1: snapping a two day losing streak. We have got the
• 0:20
  Speaker 1: SMP up nine points now to fifty nine, a gain
• 0:24
  Speaker 1: of four tenths of one percent. Down Industrial is up
• 0:27
  Speaker 1: a hundred and fourteen points, up six tenths of one percent,
• 0:30
  Speaker 1: and has stack up twenty six, a gain of five
• 0:33
  Speaker 1: tenths of one percent. The tenure down nine thirty seconds,
• 0:36
  Speaker 1: the old one point seven two percent. Gold is down
• 0:39
  Speaker 1: twenty cents, the ounce to twelve sixty nine. Little chains
• 0:42
  Speaker 1: their crude oil forty nine seventy four for a barrel
• 0:45
  Speaker 1: of West Texas Intermediate crude. It is up now by
• 0:48
  Speaker 1: two point two percent. I'm Charlie Pellett. Thatat's of Bloomberg
• 0:51
  Speaker 1: Business Flash. You're listening to Taking Stock with Pin Box
• 0:58
  Speaker 1: and Kathleen Hays on blue Bird Radio. Let's take Stock
• 1:02
  Speaker 1: of Global markets with Hugh Johnson. He is the chairman
• 1:05
  Speaker 1: and the chief investment Officer for Hugh Johnson Advisors, helping
• 1:08
  Speaker 1: to manage more than one point to billion dollars in
• 1:11
  Speaker 1: customer assets based in all the New York Hugh Johnson,
• 1:15
  Speaker 1: welcome to the program, to be with you, Tim. All right,
• 1:18
  Speaker 1: so are you gonna make some rational sense about what's
• 1:20
  Speaker 1: going on in the stock market. I understand that earnings
• 1:23
  Speaker 1: are not great, So why would stocks be moving consistently higher? Well,
• 1:27
  Speaker 1: they're not really moving consistently higher. That's one one observation
• 1:31
  Speaker 1: I would make you know, if you look back about
• 1:33
  Speaker 1: the last eight eight to ten weeks and they look
• 1:36
  Speaker 1: at the S and P five, it seems to be
• 1:39
  Speaker 1: really stuck in this sort of fifty on the low side,
• 1:43
  Speaker 1: maybe ninety on the high side. We're not making much progress.
• 1:47
  Speaker 1: We have good days, utter point days on the upside,
• 1:50
  Speaker 1: hotter point days on the down side, but we're really
• 1:53
  Speaker 1: not making any progress. And I would say that the
• 1:55
  Speaker 1: reason for that, PIM is the only explanation I can give,
• 1:59
  Speaker 1: is that we've hit the hit the wall of overvaluation,
• 2:02
  Speaker 1: and a lot of investors, especially sophisticated investors, are saying,
• 2:06
  Speaker 1: under the current earning scenario, it's really hard to make
• 2:09
  Speaker 1: the case for a significant move up in stock prices,
• 2:13
  Speaker 1: So something's got to give. Something's got to give. On
• 2:15
  Speaker 1: the earning side, prospects for earnings have got to get
• 2:18
  Speaker 1: a lot better before people will really step up to
• 2:21
  Speaker 1: the plate at this level unless we get that outbreak
• 2:24
  Speaker 1: of speculation. Is it because h that there's just not
• 2:30
  Speaker 1: broadly speaking enough growth for earnings to be stronger? Now
• 2:36
  Speaker 1: we know, of course, in any economy, in any industry
• 2:39
  Speaker 1: or sector, there are there are companies that grow regardless, right,
• 2:42
  Speaker 1: but if you look at the fact that the economy
• 2:44
  Speaker 1: in the first half grew went just over one GDP,
• 2:47
  Speaker 1: that's not so hot. Uh, the second quarters a third
• 2:50
  Speaker 1: quarter now, corny Atlanta fan is looking like just over
• 2:52
  Speaker 1: two percent. If you have age those three quarters, you know,
• 2:54
  Speaker 1: what do you have? Not a lot of GDP growth?
• 2:56
  Speaker 1: What is that? Macro kind of fundamental fact mean for
• 3:00
  Speaker 1: companies were trying to make money and grow those earnings
• 3:04
  Speaker 1: just exactly what you suspect. It's awfully hard. You know,
• 3:07
  Speaker 1: we've had real good earnings growth until recently, and we've
• 3:10
  Speaker 1: had real good economic growth, but everything is slowed down there.
• 3:13
  Speaker 1: There are a lot of reasons for it. Number one,
• 3:15
  Speaker 1: of course, is that the labor force is not is
• 3:18
  Speaker 1: really anemic. The growth rate of the labor force simply
• 3:20
  Speaker 1: isn't there. Participation rate down, productivity is not doing what
• 3:25
  Speaker 1: it should do. It's hard to make the case quite frankly, Kathleen,
• 3:27
  Speaker 1: none of these conditions for anything but two and a
• 3:31
  Speaker 1: half percent growth on the high side, as I look
• 3:33
  Speaker 1: at it, we're looking at one and a half percent
• 3:35
  Speaker 1: in the two thousand and sixteen and at best in
• 3:38
  Speaker 1: two thousand and seventeen and eighteen two point three percent growth.
• 3:41
  Speaker 1: And so under those conditions, any any company that's trying
• 3:45
  Speaker 1: to do business, uh, domestically, and there's not much going
• 3:49
  Speaker 1: on elsewhere in the world either. Uh, it's really hard
• 3:52
  Speaker 1: to make the case for strong revenue growth and strong
• 3:54
  Speaker 1: earnings growth. It's just really tough to do that. You
• 3:57
  Speaker 1: you mentioned valuation, and I'm wondering if you could just
• 4:00
  Speaker 1: off for a little bit of detail, maybe even an anecdote,
• 4:03
  Speaker 1: because you know, the concept of valuation can be very
• 4:06
  Speaker 1: amorphous when it comes to stocks. I mean, if I,
• 4:09
  Speaker 1: you know, you went into a store and saw a
• 4:11
  Speaker 1: banana and it was priced at twenty bucks, you you know,
• 4:14
  Speaker 1: you'd recoil and you'd say, wow, that's that's just too
• 4:17
  Speaker 1: expensive unless it's a I don't know, Golden Banan or something.
• 4:20
  Speaker 1: But you know, like for example, Goldman Sacks. The stock
• 4:22
  Speaker 1: is of four dollars today, a hundred and sixty six
• 4:25
  Speaker 1: bucks to share. Uh, it's trading at a pe of
• 4:28
  Speaker 1: about eleven and a half. Tell people what that means
• 4:31
  Speaker 1: in terms of valuation and how you view that, Well,
• 4:34
  Speaker 1: you gotta look at it historically, and you have to
• 4:36
  Speaker 1: if you look at the overall market. Uh. You there
• 4:39
  Speaker 1: are two things that really make make the case for valuation,
• 4:42
  Speaker 1: and one is earnings. And of course there we're talking
• 4:45
  Speaker 1: about you know, as we've just been talking slow earnings growth.
• 4:48
  Speaker 1: In fact, it will be down in two thousand and
• 4:51
  Speaker 1: sixteen up maybe at best something like oh say one
• 4:54
  Speaker 1: and a half percent in two thousand seventeen. That's not
• 4:57
  Speaker 1: much growth for the market or that. You can't really
• 5:00
  Speaker 1: hang your head on that. So you just hope that
• 5:03
  Speaker 1: the other side of the equation is for that given
• 5:05
  Speaker 1: level of earnings, even though it's not very high, that
• 5:09
  Speaker 1: investors will pay a high price for it. Tho those
• 5:12
  Speaker 1: price earnings ratios will go up. While price earnings ratios unfortunately,
• 5:16
  Speaker 1: our function of interest rates and we know the FED
• 5:19
  Speaker 1: and we think, we suspect very strongly the Fed is
• 5:21
  Speaker 1: going to be raising rates. Other interest rates will be
• 5:23
  Speaker 1: going up. Well, if interest rates are going up, price
• 5:26
  Speaker 1: earnings ratios will come down a little bit. So you
• 5:29
  Speaker 1: put those two things together. Earnings on the one side,
• 5:32
  Speaker 1: you don't get much there. Price earnings ratios on the
• 5:36
  Speaker 1: other side, you don't get anything there, and it might
• 5:38
  Speaker 1: even go down. And you ask yourself the question. You
• 5:40
  Speaker 1: scratch your head, what is it? Where's the beef? What's
• 5:44
  Speaker 1: going to drive this market higher? And unless it's speculation,
• 5:49
  Speaker 1: you know, I'm I'm very puzzled, and I'm hoping for
• 5:52
  Speaker 1: that I'm wrong. I'm hoping something happens and I can
• 5:54
  Speaker 1: make the case for stronger earnings growth, but I can't
• 5:57
  Speaker 1: do it yet, and I've been trying for three or
• 5:58
  Speaker 1: four months to do it. And then, of course you
• 6:00
  Speaker 1: have the Federal Reservice is going to probably raise the
• 6:03
  Speaker 1: key rate once for the rest of the year, and
• 6:04
  Speaker 1: then maybe a couple of times next year. It doesn't
• 6:07
  Speaker 1: really slow things down much. ECB may buy some fewer bonds.
• 6:11
  Speaker 1: I guess here's the question. People say, OK, here's what
• 6:14
  Speaker 1: twenty bases points fifty basis point. It's not going to
• 6:17
  Speaker 1: make that much difference. But I guess maybe the again,
• 6:19
  Speaker 1: if you think the fundamental changes, two big central banks
• 6:24
  Speaker 1: becoming a little less stimulus. How much difference does that
• 6:28
  Speaker 1: make to companies to investors? Not a lot at this level, Kathleen.
• 6:32
  Speaker 1: I think you understand that. You know, interest rates are
• 6:34
  Speaker 1: banned at a lot historically low level for such a
• 6:37
  Speaker 1: long period of time, and it's not going to make
• 6:39
  Speaker 1: a big difference. It makes a little bit of a difference,
• 6:41
  Speaker 1: a little incremental difference. I mean, there's just sort of
• 6:44
  Speaker 1: a little bit less appetite or willingness or even ability
• 6:48
  Speaker 1: to borrow money. But it's not going to be all
• 6:50
  Speaker 1: that significant. It will slow a little bit, but not significantly.
• 6:54
  Speaker 1: But we're slowing from an already slow rate. And so
• 6:58
  Speaker 1: how do you make the case first stronger earnings growth,
• 7:01
  Speaker 1: stronger revenue growth under these conditions with interest rates rising, Well,
• 7:05
  Speaker 1: it's it's it's it's hard to do. That's not good
• 7:08
  Speaker 1: news that interest rates would be going up a little bit.
• 7:11
  Speaker 1: It's not all that bad news, incidentally, but it's it's
• 7:14
  Speaker 1: not particularly good news. And then, of course, on the
• 7:16
  Speaker 1: fiscal side of things. Everybody's very worried about the deficit
• 7:20
  Speaker 1: and how big it's going to be. You know, every
• 7:21
  Speaker 1: politicians talking about twenty tillion dollar deficits. If they start
• 7:25
  Speaker 1: to move towards restraint, start to reduce spending, and you've
• 7:28
  Speaker 1: got the Federal Reserve raising interest rates. Well, on a
• 7:31
  Speaker 1: big picture basis, you've got a little bit to be
• 7:34
  Speaker 1: concerned about. And let's let's keep in mind that this
• 7:38
  Speaker 1: is that we're not in the early stages of this cycle.
• 7:41
  Speaker 1: We're in the later stages this cycle, or at least
• 7:43
  Speaker 1: the cycle is well along. I mean ninety one months
• 7:45
  Speaker 1: in the averages fifty seven months. So you know, um,
• 7:50
  Speaker 1: it's just I'm a big buyer stocks. I'm a ball
• 7:53
  Speaker 1: on stocks. I've been that way all my life. But
• 7:56
  Speaker 1: right now I'm having a little bit tougher time making
• 7:58
  Speaker 1: the case. Can you make the case from buying an
• 8:00
  Speaker 1: energy stock like Exxon Mobile. I was looking at your
• 8:04
  Speaker 1: comments about commodity prices. They have certainly risen consistently this year. Well,
• 8:10
  Speaker 1: now that now you're getting right at it, which is
• 8:12
  Speaker 1: you've got to find things that you know really haven't
• 8:15
  Speaker 1: done that well. If we take a look at the
• 8:17
  Speaker 1: last two or three years. And obviously energy prices are
• 8:20
  Speaker 1: oil prices being down, energy stocks not having performed well,
• 8:23
  Speaker 1: they're catching up now, you bet. The question really is
• 8:28
  Speaker 1: when we get to the energy sector of a portfolio.
• 8:30
  Speaker 1: First of all, you've got good valuation metrics there uh,
• 8:33
  Speaker 1: it's it's not overvalued. Other parts of the market may
• 8:36
  Speaker 1: be overvalued. It's not overvalued. It's undervalued. That's number one.
• 8:41
  Speaker 1: So therefore you have to make the case for or
• 8:43
  Speaker 1: you have to be comfortable that oil prices are gonna
• 8:45
  Speaker 1: stay at current levels and maybe even move a little higher.
• 8:48
  Speaker 1: I do a lot of work on oil prices, and
• 8:50
  Speaker 1: I can make the case for the low fifties. Even
• 8:53
  Speaker 1: moving up a little bit from there may be very volatile,
• 8:56
  Speaker 1: but moving up a little from there it makes a
• 8:58
  Speaker 1: real good case for an undervalued sector of the market.
• 9:02
  Speaker 1: And when you're putting together a portfolio and junia energy sector,
• 9:06
  Speaker 1: make sure that under under conditions of rising oil prices
• 9:10
  Speaker 1: you have exploration companies a company like x and would
• 9:12
  Speaker 1: be a great buy, and also hedge that with a
• 9:15
  Speaker 1: company like a refiner like Valero, which we own in
• 9:18
  Speaker 1: all our portfolios. I owned personally. Valerio is not going
• 9:21
  Speaker 1: to do well when rising prices are rising, but it'll
• 9:23
  Speaker 1: give you a hedge in case we're wrong and prices
• 9:26
  Speaker 1: oil prices go down. That's very complex, but the energy
• 9:29
  Speaker 1: sector is a very attractive sector. Technology who who could be? Again,
• 9:33
  Speaker 1: you're not gonna picked by the whole industry, but you
• 9:35
  Speaker 1: can say that's a company I can make some money
• 9:37
  Speaker 1: on Apple. Apple. I I've set Apple so many times
• 9:41
  Speaker 1: for so much, so often, and we've we've had obviously
• 9:44
  Speaker 1: weathered some periods when there's a lot of skepticism about Apple,
• 9:47
  Speaker 1: what are they gonna do next? But when you take
• 9:49
  Speaker 1: a look at the obvious metrics and Apple, when you
• 9:52
  Speaker 1: take a look at their balance sheet and see the
• 9:53
  Speaker 1: cash position, when you take a look at the cash
• 9:55
  Speaker 1: that's being the cash flow analysis, when you take a
• 9:58
  Speaker 1: look at the cash that's being errated. Even if and
• 10:02
  Speaker 1: I think this will happen, even if the growth rate
• 10:04
  Speaker 1: slows from something and let's call it a growth rate
• 10:07
  Speaker 1: down to a four percent growth rate, and they don't
• 10:09
  Speaker 1: come up with a genuinely new idea, you still have
• 10:14
  Speaker 1: such a large, powerful company. They can do an awful lot.
• 10:18
  Speaker 1: They can raise dividends, they can buy stock back and
• 10:21
  Speaker 1: it hardly will make a blip on their balance sheet.
• 10:24
  Speaker 1: So I look at Apple and I think that's a
• 10:26
  Speaker 1: company that, Yeah, I know I have to go through
• 10:29
  Speaker 1: a lot of tough days with Apple, but I think
• 10:31
  Speaker 1: the upside potential there is let's call it a hundred
• 10:34
  Speaker 1: and forty dollars a barrel as we excuse me, barrel
• 10:37
  Speaker 1: hundred forty a price uh target um over the over
• 10:43
  Speaker 1: a little bit longer period of time. You know, sometimes
• 10:45
  Speaker 1: people think Apple does sell barrels of of iPhones, Hugh,
• 10:50
  Speaker 1: So maybe your barrel idea for Apple is not a
• 10:52
  Speaker 1: bad one. G Johnson, Chairman, chief investment officer of Hugh
• 10:56
  Speaker 1: Johnson Advisors. He said it's getting very tough to make
• 10:59
  Speaker 1: a case for the stock market to move significantly higher.
• 11:02
  Speaker 1: A longtime bull, he says he can't quite do it,
• 11:04
  Speaker 1: but he keeps trying. I'm Kathleen Hayes along with him. Fox.
• 11:07
  Speaker 1: We're gonna come to the market clothes the movers and
• 11:09
  Speaker 1: shakers coming up on taking stock. This is Bloomberg. H