Market Overview
- Mixed market performance on the previous day
- Big banks experiencing declines due to changes in capital requirements
- Oil prices down, with Brent crude under $70 for the first time since 2021
KEY POINTS
Banking Sector
- Federal Reserve backing off the idea of increasing bank capital by 20%
- Banks redeeming preferred stocks and not replacing them
- Concerns about U.S. banks becoming uncompetitive in international markets
Oil and Energy
- Weak demand from China and increased production from non-OPEC members
- Possibility of OPEC making additional production cuts
- Long-term positive outlook for natural gas and crude oil companies due to:
- Rehoming of industries
- Electrification trends
- AI and quantum computing driving energy demand
Nuclear Energy
- Current nuclear capacity insufficient to meet future energy needs
- Regulatory and construction processes causing delays and increased costs
- Need for approximately 198 more nuclear plants to meet future energy demand
Spotlight on Energy Companies
Coterra Energy ($CTRA), Devon Energy ($DNV), and Kinder Morgan ($KMI)
These companies are highlighted in the report as potential buying opportunities due to current market conditions and long-term energy trends.
Key Points Include:
- Market Opportunity: The current downturn in oil and natural gas prices is creating a buying opportunity for these companies. They are trading at low price-to-earnings ratios, low price-to-book values, and low price-to-sales ratios.
- Shareholder Returns: These companies are noted for their generous shareholder return policies, including nice dividends and stock buybacks.
- Long-term Outlook: The report is bullish on these companies due to favorable long-term dynamics for natural gas and crude oil prices, particularly in the United States. Factors contributing to this positive outlook include:
- Rehoming of industries
- Increasing electrification (cars, homes, buses, etc.)
- Growing energy demand from AI and quantum computing
- Bridge to the Future: Natural gas, in particular, is seen as a crucial bridge to a future energy mix that will likely combine nuclear and renewable sources. This transition is expected to take until at least 2050-2055, even with aggressive development.
- Valuation: These companies are described as trading at “ridiculously low price-to-earnings ratios” and very low price-to-book and price-to-sales ratios.
- Investment Opportunity: The report characterizes these stocks as “massive opportunities for patient, aggressive, long-term investors.”
- Natural Gas Focus: While not explicitly stated for each company, the emphasis on natural gas suggests that Coterra Energy, Devon Energy, and Kinder Morgan all have significant exposure to the natural gas market.
Market Trends and Investment Strategy
- Market remains in a strong uptrend, despite recent pullbacks
- Importance of watching for “4% rule” signals in new daily lows
- Focus on valuation, trend, and quality metrics for investment decisions
The 4% Rule: A Key Market Indicator
The transcript discusses an important market indicator called the “4% rule,” which was developed by Larry Williams and Ralph Fitch. Here are the key points about this rule:
- Origin: The 4% rule comes from a paper titled “Ripple Effect of the New Daily Lows” by Ralph Fentz and Larry Williams. This paper won the 2024 Charles Dow Award from the Certified Market Technicians Association for outstanding research.
- Definition: The 4% rule is triggered when 4% or more of all stocks on the New York Stock Exchange hit new lows on a single day.
- Significance: While not always accurate (less than a 50% win rate), all major crashes and corrections since 1980 have been preceded by one of these 4% down days.
- Pattern: These 4% down days tend to cluster, occurring repeatedly as a sell-off accelerates.
- Strategy Application: The paper suggests a simple strategy:
- Sell the market when there’s a 4% new daily low day
- Buy back in when you stop having 4% new daily low days
- Historical Performance: This strategy has outperformed the market by about 30% over the last 44 years.
- Usage: The 4% rule serves as a warning signal. If you see a 4% new low day, your level of concern should increase significantly.
- Context: In the current market, the transcript suggests watching for these 4% days, as we’re nearing a point where they might occur due to the long-running two-year uptrend.
- Action Point: The 4% rule, combined with a change in the overall market trend, could signal a time to take protective action in your portfolio.
- Preparation: The transcript mentions that they’ve prepared for potential market weakness by raising cash and setting up “black swan hedges.”
This 4% rule provides a quantitative method for identifying potential market turning points and can be a valuable tool for risk management in investment portfolios. However, it’s important to note that no single indicator should be used in isolation, and it should be considered alongside other market analysis tools and strategies.
Portfolio Update
- Shareholder Yield Portfolio performance:
- 5.61% average dividend yield
- Double-digit dividend growth rate
- 17% average return on equity
- 12x earnings multiple
- 3% average buyback rate
- Top yielding stocks: NextEra Energy Partners, FSKKR, FBRT, Carlyle Secured Lending Fund, Western Union
Economic Outlook
- Signs of economic weakness, particularly in manufacturing
- Expectation of a 25 basis point interest rate cut
- Potential volatility in the coming period
Conclusion
- Importance of focusing on trend, valuation, and quality metrics rather than short-term news and events
- Opportunities in undervalued, high-quality companies with strong shareholder return