Why a CIO is waiting for a ‘serious panic’ in the stock market

(Bloomberg) — Stocks have rallied violently over the past week after nearly slipping into a bear market. Don’t get too excited about it, said Victoria Greene, founding partner and chief investment officer at G Squared Private Wealth.

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Greene joins this week’s “What Goes Up” podcast to talk about why she thinks the sell-off isn’t over yet, and shares her thoughts on the outlook for oil and energy stocks. Below are lightly edited and condensed highlights of the conversation. Click here to listen to the entire podcast and subscribe to Apple Podcasts or wherever you listen.

Q: Do you think we have bottomed out?

A: I don’t think we’ve found the bottom yet. I just feel like we’re not done yet. I think it’s more of a first stop because I always ask, what are our catalysts and how are we going to get growth? You really don’t see a lot of earnings revisions. So we talked, valuations have come down. Yes, the P-part of the P/E ratio has fallen. What happens when E also starts to fall back? This has two parts.

Having said that, it’s been held — I just don’t think we’re done. I thought it was more of a relief rally. If you look for signs of capitulation – days of 90% drop, VIX soaring – we’re just not there yet. Yes, cash balances have definitely increased, and yes, we’ve seen some stock sell-offs, but not a real panic. Don’t sound like a snob, but I need a strong panic. We just haven’t seen that firm, absolute surrender, where everything is sold off. We haven’t. Then my concern is, where is your growth. Margins will definitely be squeezed, and we’ll have to wait until the Fed is able to tip the economy into recession to stop some of that.

Q: Your company is located in Texas. Does the energy industry affect your customers?

A: This may make them more optimistic about the energy industry. But some of our clients, we actually operate ex-energy because it depends on their exposure. So if you own a privately held company or you’re on the board of a public company, you’ve got that kind of exposure. So we’re actually trying to diversify and reduce concentration because everybody in Texas knows that the oil market is cyclical. So you’ve had a great time, but you know at some point it also has its flip side. The past decade has been tough for the energy industry. We’ve had 5 car accidents in 10 years. So it’s just a boredom, well, yeah, we’re bullish on energy and the energy transition, and ESG is coming, electricity is coming, and it’s going to take longer to adopt. We will see that in 2022.

So I might say, don’t generalize, but the attitude of a lot of our clients is that the demise of energy is overstated. So it’s not that they’re not worried about ESG or climate change or anything like that, but that tends to make them more willing to get a foothold in the space. So I do think that what you know affects how comfortable you are investing. The same thing happens when you’re in California — if you’re in the San Francisco area, you’re probably very, very comfortable with your investment in tech exposure and more comfortable with early stage and small tech and innovators.

Q: Which energy companies do you like?

A: It touches on what is happening in the world today and the larger theme of deglobalisation. As you can probably see Russia out of the market and you see all this supply and demand rebalancing, it hits commodities even more. It’s not just energy that it hits. It’s fertilizer, it’s all exports and some precious metal, palladium. They are a huge supplier of palladium. So you’re going to see this rebalancing and shift, and all of those things take a lot of time to redistribute and build supply chains. Therefore, our base case is that oil prices will remain elevated for the next 18 months. I don’t think it will come back. I don’t see a demand crunch happening. Yes, China, you’re life-or-death to China in a way, but if you look at travel and consumption in the U.S. and Europe and where the trends are, most developed countries no longer have a zero-pandemic policy.

I know now Covid is like a dirty word because we are tired of talking about it. But it still exists. This is what affects China and Chinese demand. Chinese demand could also become a bit chaotic, as China and India have shown a willingness to buy cheap Russian crude. Some of them are geographically easy for them, and they can buy it for $30, and they’re worried about economic growth. So we may see some weakening of demand in China. But overall, I think $90 to $100 a barrel over the next 18 months is entirely possible. You haven’t seen this ambitious mentality make a comeback.

Then obviously we have the OPEC change. So you’re seeing a massive divestment into the oil and gas industry. Even now, we’re fine, well below peak. We are still well below the oil and gas rigs we were in during the pandemic. So you’ve seen the oil companies — you’ll see this theme in my favorite oil and gas stocks, Devon, EOG, FANG (Diamondback Energy) and Pioneer — they’re based in the US and have a large footprint in the Permian. Their break even is low and they are definitely selling cash to shareholders. They won’t put it back in the ground. They said, ‘Thanks to the shareholders for their trust in us. This is your money. Like ‘really sorry we didn’t make you money for ten years, but go for it. Let’s make some money now.

But you don’t see that crazy mentality that happens when other oil prices spike, because that’s going to happen, you’ve got a huge influx of, “let’s add more rigs out there,” it’s just that supply and demand will eventually Flip. If you look at the slope of how the rig count increases, it’s a much lower trajectory. No one really puts a lot of money into capital expenditures. So we like stocks that are now giving our shareholders better returns — like Devon Energy at $100 a barrel is like a 16% free cash flow yield. They roll out 50% of free cash flow in the form of variable dividends each quarter. You’re talking a lot of money to sit and wait, and you’re probably still getting price appreciation because they’re making more money all the time. If you look at where earnings revisions are happening, the only place we think earnings will go up is energy. So the price-to-earnings ratio actually remains, even though many of these stocks have gone up in price so much, the price-to-earnings ratio is actually still very nominal and very value-oriented.

(These are just the highlights. Click here to listen to the entire podcast.)

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