WEBVTT - Hugh Johnson: Energy Sector Very Attractive, Likes XOM (Audio)

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<v Speaker 1>I'm Charlie Pellett. Stocks are advancing the SMP five hundred index,

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<v Speaker 1>snapping a two day losing streak. We have got the

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<v Speaker 1>SMP up nine points now to fifty nine, a gain

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<v Speaker 1>of four tenths of one percent. Down Industrial is up

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<v Speaker 1>a hundred and fourteen points, up six tenths of one percent,

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<v Speaker 1>and has stack up twenty six, a gain of five

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<v Speaker 1>tenths of one percent. The tenure down nine thirty seconds,

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<v Speaker 1>the old one point seven two percent. Gold is down

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<v Speaker 1>twenty cents, the ounce to twelve sixty nine. Little chains

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<v Speaker 1>their crude oil forty nine seventy four for a barrel

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<v Speaker 1>of West Texas Intermediate crude. It is up now by

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<v Speaker 1>two point two percent. I'm Charlie Pellett. Thatat's of Bloomberg

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<v Speaker 1>Business Flash. You're listening to Taking Stock with Pin Box

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<v Speaker 1>and Kathleen Hays on blue Bird Radio. Let's take Stock

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<v Speaker 1>of Global markets with Hugh Johnson. He is the chairman

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<v Speaker 1>and the chief investment Officer for Hugh Johnson Advisors, helping

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<v Speaker 1>to manage more than one point to billion dollars in

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<v Speaker 1>customer assets based in all the New York Hugh Johnson,

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<v Speaker 1>welcome to the program, to be with you, Tim. All right,

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<v Speaker 1>so are you gonna make some rational sense about what's

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<v Speaker 1>going on in the stock market. I understand that earnings

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<v Speaker 1>are not great, So why would stocks be moving consistently higher? Well,

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<v Speaker 1>they're not really moving consistently higher. That's one one observation

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<v Speaker 1>I would make you know, if you look back about

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<v Speaker 1>the last eight eight to ten weeks and they look

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<v Speaker 1>at the S and P five, it seems to be

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<v Speaker 1>really stuck in this sort of fifty on the low side,

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<v Speaker 1>maybe ninety on the high side. We're not making much progress.

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<v Speaker 1>We have good days, utter point days on the upside,

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<v Speaker 1>hotter point days on the down side, but we're really

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<v Speaker 1>not making any progress. And I would say that the

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<v Speaker 1>reason for that, PIM is the only explanation I can give,

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<v Speaker 1>is that we've hit the hit the wall of overvaluation,

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<v Speaker 1>and a lot of investors, especially sophisticated investors, are saying,

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<v Speaker 1>under the current earning scenario, it's really hard to make

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<v Speaker 1>the case for a significant move up in stock prices,

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<v Speaker 1>So something's got to give. Something's got to give. On

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<v Speaker 1>the earning side, prospects for earnings have got to get

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<v Speaker 1>a lot better before people will really step up to

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<v Speaker 1>the plate at this level unless we get that outbreak

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<v Speaker 1>of speculation. Is it because h that there's just not

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<v Speaker 1>broadly speaking enough growth for earnings to be stronger? Now

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<v Speaker 1>we know, of course, in any economy, in any industry

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<v Speaker 1>or sector, there are there are companies that grow regardless, right,

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<v Speaker 1>but if you look at the fact that the economy

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<v Speaker 1>in the first half grew went just over one GDP,

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<v Speaker 1>that's not so hot. Uh, the second quarters a third

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<v Speaker 1>quarter now, corny Atlanta fan is looking like just over

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<v Speaker 1>two percent. If you have age those three quarters, you know,

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<v Speaker 1>what do you have? Not a lot of GDP growth?

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<v Speaker 1>What is that? Macro kind of fundamental fact mean for

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<v Speaker 1>companies were trying to make money and grow those earnings

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<v Speaker 1>just exactly what you suspect. It's awfully hard. You know,

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<v Speaker 1>we've had real good earnings growth until recently, and we've

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<v Speaker 1>had real good economic growth, but everything is slowed down there.

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<v Speaker 1>There are a lot of reasons for it. Number one,

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<v Speaker 1>of course, is that the labor force is not is

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<v Speaker 1>really anemic. The growth rate of the labor force simply

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<v Speaker 1>isn't there. Participation rate down, productivity is not doing what

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<v Speaker 1>it should do. It's hard to make the case quite frankly, Kathleen,

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<v Speaker 1>none of these conditions for anything but two and a

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<v Speaker 1>half percent growth on the high side, as I look

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<v Speaker 1>at it, we're looking at one and a half percent

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<v Speaker 1>in the two thousand and sixteen and at best in

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<v Speaker 1>two thousand and seventeen and eighteen two point three percent growth.

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<v Speaker 1>And so under those conditions, any any company that's trying

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<v Speaker 1>to do business, uh, domestically, and there's not much going

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<v Speaker 1>on elsewhere in the world either. Uh, it's really hard

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<v Speaker 1>to make the case for strong revenue growth and strong

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<v Speaker 1>earnings growth. It's just really tough to do that. You

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<v Speaker 1>you mentioned valuation, and I'm wondering if you could just

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<v Speaker 1>off for a little bit of detail, maybe even an anecdote,

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<v Speaker 1>because you know, the concept of valuation can be very

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<v Speaker 1>amorphous when it comes to stocks. I mean, if I,

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<v Speaker 1>you know, you went into a store and saw a

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<v Speaker 1>banana and it was priced at twenty bucks, you you know,

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<v Speaker 1>you'd recoil and you'd say, wow, that's that's just too

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<v Speaker 1>expensive unless it's a I don't know, Golden Banan or something.

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<v Speaker 1>But you know, like for example, Goldman Sacks. The stock

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<v Speaker 1>is of four dollars today, a hundred and sixty six

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<v Speaker 1>bucks to share. Uh, it's trading at a pe of

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<v Speaker 1>about eleven and a half. Tell people what that means

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<v Speaker 1>in terms of valuation and how you view that, Well,

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<v Speaker 1>you gotta look at it historically, and you have to

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<v Speaker 1>if you look at the overall market. Uh. You there

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<v Speaker 1>are two things that really make make the case for valuation,

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<v Speaker 1>and one is earnings. And of course there we're talking

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<v Speaker 1>about you know, as we've just been talking slow earnings growth.

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<v Speaker 1>In fact, it will be down in two thousand and

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<v Speaker 1>sixteen up maybe at best something like oh say one

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<v Speaker 1>and a half percent in two thousand seventeen. That's not

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<v Speaker 1>much growth for the market or that. You can't really

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<v Speaker 1>hang your head on that. So you just hope that

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<v Speaker 1>the other side of the equation is for that given

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<v Speaker 1>level of earnings, even though it's not very high, that

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<v Speaker 1>investors will pay a high price for it. Tho those

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<v Speaker 1>price earnings ratios will go up. While price earnings ratios unfortunately,

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<v Speaker 1>our function of interest rates and we know the FED

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<v Speaker 1>and we think, we suspect very strongly the Fed is

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<v Speaker 1>going to be raising rates. Other interest rates will be

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<v Speaker 1>going up. Well, if interest rates are going up, price

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<v Speaker 1>earnings ratios will come down a little bit. So you

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<v Speaker 1>put those two things together. Earnings on the one side,

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<v Speaker 1>you don't get much there. Price earnings ratios on the

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<v Speaker 1>other side, you don't get anything there, and it might

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<v Speaker 1>even go down. And you ask yourself the question. You

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<v Speaker 1>scratch your head, what is it? Where's the beef? What's

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<v Speaker 1>going to drive this market higher? And unless it's speculation,

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<v Speaker 1>you know, I'm I'm very puzzled, and I'm hoping for

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<v Speaker 1>that I'm wrong. I'm hoping something happens and I can

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<v Speaker 1>make the case for stronger earnings growth, but I can't

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<v Speaker 1>do it yet, and I've been trying for three or

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<v Speaker 1>four months to do it. And then, of course you

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<v Speaker 1>have the Federal Reservice is going to probably raise the

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<v Speaker 1>key rate once for the rest of the year, and

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<v Speaker 1>then maybe a couple of times next year. It doesn't

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<v Speaker 1>really slow things down much. ECB may buy some fewer bonds.

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<v Speaker 1>I guess here's the question. People say, OK, here's what

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<v Speaker 1>twenty bases points fifty basis point. It's not going to

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<v Speaker 1>make that much difference. But I guess maybe the again,

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<v Speaker 1>if you think the fundamental changes, two big central banks

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<v Speaker 1>becoming a little less stimulus. How much difference does that

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<v Speaker 1>make to companies to investors? Not a lot at this level, Kathleen.

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<v Speaker 1>I think you understand that. You know, interest rates are

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<v Speaker 1>banned at a lot historically low level for such a

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<v Speaker 1>long period of time, and it's not going to make

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<v Speaker 1>a big difference. It makes a little bit of a difference,

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<v Speaker 1>a little incremental difference. I mean, there's just sort of

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<v Speaker 1>a little bit less appetite or willingness or even ability

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<v Speaker 1>to borrow money. But it's not going to be all

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<v Speaker 1>that significant. It will slow a little bit, but not significantly.

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<v Speaker 1>But we're slowing from an already slow rate. And so

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<v Speaker 1>how do you make the case first stronger earnings growth,

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<v Speaker 1>stronger revenue growth under these conditions with interest rates rising, Well,

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<v Speaker 1>it's it's it's it's hard to do. That's not good

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<v Speaker 1>news that interest rates would be going up a little bit.

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<v Speaker 1>It's not all that bad news, incidentally, but it's it's

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<v Speaker 1>not particularly good news. And then, of course, on the

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<v Speaker 1>fiscal side of things. Everybody's very worried about the deficit

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<v Speaker 1>and how big it's going to be. You know, every

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<v Speaker 1>politicians talking about twenty tillion dollar deficits. If they start

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<v Speaker 1>to move towards restraint, start to reduce spending, and you've

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<v Speaker 1>got the Federal Reserve raising interest rates. Well, on a

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<v Speaker 1>big picture basis, you've got a little bit to be

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<v Speaker 1>concerned about. And let's let's keep in mind that this

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<v Speaker 1>is that we're not in the early stages of this cycle.

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<v Speaker 1>We're in the later stages this cycle, or at least

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<v Speaker 1>the cycle is well along. I mean ninety one months

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<v Speaker 1>in the averages fifty seven months. So you know, um,

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<v Speaker 1>it's just I'm a big buyer stocks. I'm a ball

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<v Speaker 1>on stocks. I've been that way all my life. But

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<v Speaker 1>right now I'm having a little bit tougher time making

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<v Speaker 1>the case. Can you make the case from buying an

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<v Speaker 1>energy stock like Exxon Mobile. I was looking at your

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<v Speaker 1>comments about commodity prices. They have certainly risen consistently this year. Well,

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<v Speaker 1>now that now you're getting right at it, which is

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<v Speaker 1>you've got to find things that you know really haven't

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<v Speaker 1>done that well. If we take a look at the

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<v Speaker 1>last two or three years. And obviously energy prices are

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<v Speaker 1>oil prices being down, energy stocks not having performed well,

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<v Speaker 1>they're catching up now, you bet. The question really is

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<v Speaker 1>when we get to the energy sector of a portfolio.

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<v Speaker 1>First of all, you've got good valuation metrics there uh,

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<v Speaker 1>it's it's not overvalued. Other parts of the market may

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<v Speaker 1>be overvalued. It's not overvalued. It's undervalued. That's number one.

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<v Speaker 1>So therefore you have to make the case for or

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<v Speaker 1>you have to be comfortable that oil prices are gonna

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<v Speaker 1>stay at current levels and maybe even move a little higher.

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<v Speaker 1>I do a lot of work on oil prices, and

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<v Speaker 1>I can make the case for the low fifties. Even

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<v Speaker 1>moving up a little bit from there may be very volatile,

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<v Speaker 1>but moving up a little from there it makes a

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<v Speaker 1>real good case for an undervalued sector of the market.

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<v Speaker 1>And when you're putting together a portfolio and junia energy sector,

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<v Speaker 1>make sure that under under conditions of rising oil prices

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<v Speaker 1>you have exploration companies a company like x and would

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<v Speaker 1>be a great buy, and also hedge that with a

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<v Speaker 1>company like a refiner like Valero, which we own in

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<v Speaker 1>all our portfolios. I owned personally. Valerio is not going

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<v Speaker 1>to do well when rising prices are rising, but it'll

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<v Speaker 1>give you a hedge in case we're wrong and prices

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<v Speaker 1>oil prices go down. That's very complex, but the energy

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<v Speaker 1>sector is a very attractive sector. Technology who who could be? Again,

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<v Speaker 1>you're not gonna picked by the whole industry, but you

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<v Speaker 1>can say that's a company I can make some money

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<v Speaker 1>on Apple. Apple. I I've set Apple so many times

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<v Speaker 1>for so much, so often, and we've we've had obviously

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<v Speaker 1>weathered some periods when there's a lot of skepticism about Apple,

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<v Speaker 1>what are they gonna do next? But when you take

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<v Speaker 1>a look at the obvious metrics and Apple, when you

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<v Speaker 1>take a look at their balance sheet and see the

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<v Speaker 1>cash position, when you take a look at the cash

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<v Speaker 1>that's being the cash flow analysis, when you take a

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<v Speaker 1>look at the cash that's being errated. Even if and

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<v Speaker 1>I think this will happen, even if the growth rate

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<v Speaker 1>slows from something and let's call it a growth rate

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<v Speaker 1>down to a four percent growth rate, and they don't

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<v Speaker 1>come up with a genuinely new idea, you still have

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<v Speaker 1>such a large, powerful company. They can do an awful lot.

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<v Speaker 1>They can raise dividends, they can buy stock back and

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<v Speaker 1>it hardly will make a blip on their balance sheet.

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<v Speaker 1>So I look at Apple and I think that's a

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<v Speaker 1>company that, Yeah, I know I have to go through

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<v Speaker 1>a lot of tough days with Apple, but I think

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<v Speaker 1>the upside potential there is let's call it a hundred

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<v Speaker 1>and forty dollars a barrel as we excuse me, barrel

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<v Speaker 1>hundred forty a price uh target um over the over

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<v Speaker 1>a little bit longer period of time. You know, sometimes

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<v Speaker 1>people think Apple does sell barrels of of iPhones, Hugh,

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<v Speaker 1>So maybe your barrel idea for Apple is not a

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<v Speaker 1>bad one. G Johnson, Chairman, chief investment officer of Hugh

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<v Speaker 1>Johnson Advisors. He said it's getting very tough to make

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<v Speaker 1>a case for the stock market to move significantly higher.

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<v Speaker 1>A longtime bull, he says he can't quite do it,

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<v Speaker 1>but he keeps trying. I'm Kathleen Hayes along with him. Fox.

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<v Speaker 1>We're gonna come to the market clothes the movers and

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<v Speaker 1>shakers coming up on taking stock. This is Bloomberg. H