Transcript of Market Mispricing Is the Opportunity

To view our most recent Wealth & Wisdom video, click here. For the transcript, edited for clarity, read on ...

Kenny Polcari: Welcome to this week's Wealth and Wisdom sponsored by Weiss Ratings. I am Kenny Polcari, your host. And each week, I speak to one of the editors here at Weiss Ratings to discuss their latest ideas and their analysis.

And today, we have the pleasure of talking to SeanBrodrick. Sean is known as the Indiana Jones of natural resources here at Weiss. He's a sharp analyst and, like me, has a "boots on the ground" perspective, loaded with years of experience. He's traveled to diamond fields north of the Arctic Circle, to the ancient city of silver and mummies in Mexico, all the way down to a gold project in the far Southern tip of Argentina.

Today's discussion will give Sean the ability to share his insight and special reports on precious metals, energy, maybe marijuana and cannabis, agriculture and more as he gathers all kinds of accolades from investors and industry leaders.

Join me in welcoming Sean Brodrick. Hey, Sean it is a pleasure to have you back.

Sean Brodrick: Hey, thanks very much for having me on.

Kenny: Listen. I think it's great. I always find our conversations to be so insightful and so exciting because you bring a whole different perspective to the conversation from, as I point down to the very beginning, our and your years of experience, right? A little gray hair goes a long way in markets, especially in markets like today.

Sean: I saw some kind of stat yesterday about how few people trading on Wall Street, this is for the big firms, have actually been through a recession and it's just frightening. It really is.

Kenny: Sean, you know what? And I say that in my note that I write every day, but there is a generation of either traders or wealth managers that started in this business in the crash of 2007, 8, 9, when rates went to zero and it was nothing but stimulus. It's been 12 or 13 years of that. And they don't know anything but that environment. And I think they're all about to get educated pretty quickly.

Sean: Yeah, I agree.

Kenny: So anyway, but we can talk about that because what you do actually helps to clear some of that noise, right? Because in fact, there is a lot of noise out there. There's noise in the media. There's noise on Twitter (TWTR). There's noise on LinkedIn, and guys like you kind of sift through that and help investors focus. And certainly, at Weiss Ratings, you've got a couple of really great premium products. So, this content, this conversation that we're having is geared especially to those subscribers, that in fact, subscribe to your premium products. They like what you do. They enjoy it. They want to hear this conversation. You have two products. One is Resource Trader, the other one's Supercycle Investor, both outstanding products. So, tell us just a little bit about what's new? What's going on at Resource Trader?

Sean: Well, Resource Trader recently, added the QID (ProShares UltraShort QQQ) because I think the market has further to go down. And so, that is a double inverse QQQ (Invesco QQQ Trust) fund. And in this kind of market, I believe, or at least it's my investment thesis. We are seeing money rotate out of the former high flying growth stocks and growth stocks generally do not make enough money to actually cover their expenses. And then seeing that money rotate into value stocks. What that means is that the Nasdaq 100 and tech stocks generally are in a real pickle. They've been hit hard, but they're probably going to get hit harder. So, if you're looking to buy insurance in this environment, that's one of the things that you want to target, because as the broad market goes down, and an old friend of mine on Wall Street used to say, when the paddy wagon comes along, it takes good girls downtown along with the bad, which means everybody gets hurt.

But the ones that are up on serious charges will be the Nasdaq 100 stocks, the former highflyers, because a lot of people still own them, and they need to sell them. And when those selling waves come, they will sell them mercilessly. So, that's something to keep in mind, but that's just on the bear side. On the bullish side, well, we just added a utility. I think that's looking extremely strong. We have other things as well. We've made a lot of money on oil and gas in Resource Trader. And that's really weakening now, but we took some gains. We'll be reentering. So, look for that because I don't believe that the big rally in energy is over. We are going to be doing more energy going forward.

Kenny: And did you see that JPMorgan (JPM) this morning? I think it was JPMorgan a $300 price target on oil?

Sean: Yeah. Well, the thing is, price targets on oil are all over the place. That's how you know this market is chaotic. I mean, I saw Citibank (C) come out with $65.

Kenny: $65. Right.

Sean: So, how do you align those two? It's not … but that's good because what that means is that people are approaching the market using different valuation techniques. Some are top down, some are bottom up. Who is right in this? And so, what this makes it, I believe, is a stock pickers market because there are stocks that will do well in this market anyway.

Kenny: And we've seen that.

Sean: Yeah. Right.

Kenny: And we've seen that. Listen, I want to just talk as you mentioned it. So, I want to make sure that the audience understands this. The QID is the pro ultra-short triple Q. So, like you said, it's the opposite, right? So, when you buy, you're actually going short the triple Q. You're going short the Nasdaq market.

Sean: You're actually going twice as short.

Kenny: Right. That's what I want to make sure they understand. It's two times levered.

Sean: And it's also not for a long-term hold. It's short-term thing.

Kenny: OK. Perfect. And that, I also want to make sure that's very clear because it's not ... The listeners should understand that it's not like you go out and buy International Business Machines Corporation (IBM), you go out and buy Amazon (AMZN), you go out and buy Apple (AAPL). Those are long-term investors. The QID is a product that you use strategically to protect and to hedge yourself against, like you said, you want to buy some insurance.

Sean: I mean, we could sell that say tomorrow, if you saw the right circumstances.

Kenny: Correct.

Sean: We have an open gain on it, but really, it's insurance. We have insurance against our other positions. My most hopeful thing would be that I end up flat. And so, all the other positions we have don't get hurt as much.

Kenny: Correct.

Sean: But I mean, things can get a lot worse. Things can get worse than I think.

Kenny: Right.

Sean: To quote another great, Yogi Berra. He said, "It's hard to make predictions, especially about the future," which is one thing that many people on Wall Street do not get. And so, I have my forecast for where things will go, but I might be wrong. So, I'm just trying to hedge things just in case.

Kenny: Right. And listen, it's smart. It's intelligent. And your subscribers and traders and people that are trying to manage their own money need to understand how you use these products, why you use these products and how strategically you use these products. Because again, QID would not be considered a long term. You don't buy it, just forget about it, like you might do with Apple or Amazon or IBM or Verizon (VZ) or telephone. This is much more of a much more of an active position that you need to take. So, tell us just a little bit. Listen, as we moved into 2022, as we know, it's been kind of a crazy year. It's been a difficult year for so many, but you've got a number of winners. Highlight two or three of them for me, so the subscribers see in fact how you've done.

Sean: Well, sure. Resource Trader, really, we made our money in energy stocks. A lot of people thought that energy was going to peak around the end of last year. In fact, I saw a whole bunch of articles on that. Energy's runway up and stuff like that, but the fundamentals kept getting better. And more importantly, the price action, we kept seeing more up volume, which just told me that's where it was easier for those stocks to go. So, that's why we grabbed 64% on Marathon Petroleum Corporation (MPC). We got nice gains on some VanEck Steel ETF (SLX) calls. We got all sorts of things that, mainly energy stocks, that's where we have been making our gains. But we've also been profiting on other things as well.

Kenny: So, let's talk about marathon for a minute. So, when was your signal? When did you tell your subscribers that they should start to create a position or go along Marathon Oil Corporation (MRO)? Was it at the end of last year? The beginning of this year?

Sean: Can I phone a friend to find out? Hang on a second. Let's just cut that for a second. See, you got to tell me what I'm going to be doing.

Kenny: Well, see, I thought maybe you had it right in front of you.

Sean: Oh, yeah. Right in front of me. Hang on.

Kenny: I like that. Can I phone a friend though? I thought that was classic.

Sean: Hang on a second. So, when did we buy that MRO? That was a good one. All right. So, we bought that one in mid-October of last year. And we just sold it on the 16th of June, and we made 64%.

Kenny: So, in mid-October just to try to understand, the stock was trading about $18 a share. Actually ... Yeah. $16, $17 a share. And if you held onto it, you sold it mid-June, you're potentially going to sell it in the 30s somewhere or low 30s, 30, 32.

Sean: We actually paid $15.79 a share and we sold it for $26 a share.

Kenny: I love you. I think that's great. Congrats. And that's a 64% return?

Sean: Yeah. Yeah.

Kenny: And that took you from October to June. So, that was what? A six or seven month holding.

Sean: Right. Some we hold a lot shorter. I mean, I don't want to sell anything as long as the big trend in it is up.

Kenny: Agreed.

Sean: Because you have to play those big trends. If you are doing hundreds of trades, that's going to do you no good. I mean, I know people who are in the accounting business, and they have customers who overtrade. So, they come in with this huge pile of stuff that has to be processed. And it's a big churn. It's a big churn. You have to pick the right trades and stick with them for a while if you can. Now, if I'm wrong on a trade, I'm going to get out. I mean, there's no-

Sean: Now if I'm wrong on a trade, I'm going to get out. You see these guys holding uranium stocks, we've actually made money on uranium stocks by the way, but there are some people who are in it for the long-term, and they don't care. So, something they bought at say 50 a couple years ago is now trading at 10, that is not a good position to be in. So, you have to know when you're wrong on a trade and accept your loss, but that works out to your advantage.

Kenny: No, it absolutely does. But I have a question for you now. As I look at the chart and Marathon Oil, now the stock has come in significantly. It's come in from the high 30s where it traded in June, it's trading back almost to where you got it in the first place at $21. So, it's down 15 or 16 points from its high and it's sitting right on its long-term 200-day trend line. Does that mean anything to you? Is that another opportunity for you to look at it? Is that on your focus list now to start looking at again?

Sean: Actually, it is. And very perceptive of you to bring that up because the 200-day moving average is the dividing line between the long-term bull and bear trend. So, I'm expecting it to test the 200-day.

Kenny: It's testing it right now. It's kissing it right now.

Sean: But what happens next? Will it bounce from this on higher volume, which is important? Because volume's so important, many people don't get that, but you need good volume and the volume really is the key as to short-term future direction, because that just lets you know what the big money's doing. It's moving in, it's moving out. So, if we can get a bounce off the 200-day on good volume, then yeah, I am a buyer again.

Kenny: And listen and I think that's perfect and that's a key technical ... If anyone's really technical, they look at the charts, that is exactly the key. But your point about higher volume, we should clarify that because if we pierce the 200-day on a higher volume, then that clearly means that you're in this distribution phase, because you've got more sellers. The buyers are there because there's a buyer for every seller. So, the buyers are there, but the buyers recognize that it is now broken as key technical level and they're willing to sit back and let the sellers come to them. If in fact the volume picks up as it tests the level and it doesn't break, then that suggests that it's going to be under accumulation that the buyers would be more aggressive than the sellers taking the stock higher.

Sean: Well, actually you bring up another great point and I'd just like to pivot a little bit, in a bear market, which we are in now, stocks to look for include, and I think this is becoming more and more important, stocks that pay nice dividends because if you buy it and you're wrong, you get paid to wait. And so, when you have a stock like Marathon with a nice dividend on it and stuff, maybe there are people who will actually buy the breakdown because they might think, "Well this breakdown will be short term and I'm buying it for the longer term and I'm going to be paid to hold it." So, that's how those stocks pay nice dividends but especially stocks that grow their dividends become very attractive in this kind of market.

Kenny: Right, which brings us to the next point about getting paid in a market like this, that's kind of volatile. It's nervous, it's anxious concerning everything that's going around in the economy and inflation and the Fed and the White House, globally, what's happening in China is that sometimes it makes perfect sense to get paid for what you own. So, you want to buy some of those stocks that are good dividend payers but also have the opportunity to offer growth potential. And that's what you pick out. So, give me another name and another one of your favorites that you picked for the Resource Trader this year.

Sean: Well, we made some, not all stocks are like energy stocks, of course. We made good money on tech resources, we did quite well on that. And so, that's a mining stock. Now one thing people should keep in mind is that we are seeing a massive correction in mining stocks right now and this is basically a China thing. We are seeing so many things pull back because people are really concerned about what's going to happen next with China. China locked down some of its major cities recently, that was due to a resurgence of COVID-19, then they reopened them. But the market seems to be saying, "You know what? We don't actually trust China on this. We think China might have another lockdown coming." So, this is making stocks, say tech resources, which we took gains on a long time ago, this is making them look stupid cheap at this point. That's a stock that's trading at a price to book of 0.85. So, at some point, a rebound is going to come in that too. And so, that's one that we made money on before, but I'd like to make money on again.

Kenny: All right, so, define for the subscriber when you said price to book, just clarify that so they understand what's going on in your head when you say that.

Sean: Sure, if you took all of a company's assets, what those assets are worth, that's its book value.

Kenny: That's its book value.

Sean: Right, and so, when a stock's actually trading below the …

Kenny: Book value.

Sean: Yeah, when a stock is trading below the actual cost of the stuff it owns, that shows that either A, people think it's going to get a lot cheaper, or there's been some kind of mispricing in the market.

Kenny: It's mispriced, correct. It could be mispriced. And that there is the opportunity. When it's mispriced is when it's the opportunity, but that's what you have to be able to decipher and guys like you do that beautifully.

Sean: Yeah, yeah, exactly.

Kenny: So, let's talk about Supercycle Investor, which is one of your other premium services. Tell us a little bit about what that is and then one or two of your favorite picks.

Sean: Sure, well Supercycle Investor really trades the big cycles. This is something that I took over from my mentor, Larry Edelson, used to work at Weiss Research, Weiss Ratings years ago. And he really taught me the ropes on a whole bunch of things. And one thing he was obsessed with is cycles. We see cycles around us all the time and commodities especially are very cyclical, but you can see cycles in all sorts of things, but oil is another one that's quite cyclical. So, we also played oil in Supercycle Investor with Shell (SHEL). We got a nice gain on that recently, but I can see a big upcycle in lithium for the whole electric car, EV market. And so, that's why earlier this year we grabbed 51% on Lithium Americas. That's why we recently grabbed ... Just last month we grabbed 44% on Sigma Lithium (SGML).

So, there's a nice one there, but we played all kinds of cycles. For example, the pandemic was cyclical, even though most people don't realize it. And so, we were able to grab a nice gain on OptimizeRx (OPRX), which is one of these healthcare firms that did well during the pandemic, just because you could see that cycle playing out. But we also knew when it was time to take gains because it was just getting weaker, and we knew the cycle was over. So, that's what Supercycle Investor is about, is playing these big cycles for hopefully big profits.

Kenny: Right, so, let's talk about Lithium Americas, which is LAC.TO, It's a $19 stock. That market cap, I think 2.6 billion.

Sean: Well, it's actually three and a half billion.

Kenny: Billion, three and a half billion.

Sean: And as you and I speak, it's about 53% off its 52-week highs. And so, considering what's happening in the lithium market, this is kind of crazy. This is one of those mispricing we talk about.

Kenny: Right, now it's trading right at lows that it's saw back in May, it's testing this low right here at 19.5.

Sean: Yeah, now it could go lower. I am not a buyer right now. But it's certainly one on my radar because I can see the big cycle in lithium. I know this company's going to do well. And how cheap will it get, please let this get a lot cheaper because I'd like to make a lot more money when it goes up. I don't own it now.

Kenny: Right, right. But Lithium Americasis not a dividend paying company just so the subscribers understand. That would be considered ... that's in that high growth, sexy tech really, on a certain level, it is a tech stock because of the industry it's in, electric vehicles.

Sean: Well, I guess, but it's also in mining, for sure. It's supposed to grow 350% next year. So, that's a company that's going to be making real money, actually scooping money up out of the ground is basically what it's going to be doing. So, yeah.

Kenny: Right, that's a great one. I've got to put that one on my watch list as well. Actually, I don't have to because I subscribe to you. So, therefore, you do it for me. That's the best part of this is that I get to get your newsletters and then take a look and then create my watch list off of your watch list or just use your watch list. And that's always great. Listen, I really appreciate your time. It's been very interesting to listen to this conversation and certainly for a lot of our premium subscribers to get the chance to hear you in your own words talk about what you're thinking, talk about what you look at, what you think of where the broad markets are now, but where the opportunities are in your space.

Sean: Yeah, well that's all good, but I would like to speak about my monthly newsletter as well, which is Wealth Megatrends. Could we talk about that for a little bit?

Kenny: Yeah, so, that's what we're going to move into now.

Sean: OK, good.

Kenny: So, tell us just a little bit about Wealth Megatrends, what's been going on recently, what the broad picture is, so that people understand.

Sean: Well, I think of Wealth Megatrends as an entry level service with really potentially premium level returns. Because to qualify for this publication, stocks not only have to pay dividends, but they have to grow those dividends. And in a bear market, it works really nice in a bull market too, but in a bear market, it works especially well because stocks that pay nice dividends and the S&P 500 as we talked about was recently yielding around 1.35%, so, if you get to 2%. maybe 2.5%, you're doing great. Stocks that pay nice dividends, they have a cushion around them.

So, when stocks fall, investors are more likely to buy those nice yielding stocks because they say, "Well, you know what? If I'm wrong, at least I'll get paid to wait." So, that really works out for them, and also, we've been really grabbing gains left and right. We just took two rounds of energy gains, that publication. We have other positions that are doing very well.

Kenny: Let's talk about that. What are the gains you took? Tell us two of the trades and Wealth Megatrends that was a great call. Tell us what went into it and then, and what people are potentially missing out on.

Sean: Sure. Hang on a second and I'm going to call it up because I don't want to get things wrong, as things go. We just took 59.38% on Conoco Phillips (COP), and we took 23.65% on Marathon Petroleum Company (MPC). There are two Marathons, which often confuses people. One is MRO, one is MPC. This is MPC. We took two rounds of gains in that. Energy has had a great run and it is pulling back, as you and I talk, but I don't think the run in energy is over.

That works out to the advantage of Wealth Megatrends subscribers because some of the best dividend growers and just nice fat yields are in energy stocks. That's something that actually works out for us because, we already took some gains. With this pullback, we're going to have a chance to buy things on the cheap again, so, I'm just looking forward to that opportunity.

Kenny: The yield, I don't know if you said this, but the yield on MPC is about 2.85%, currently, on Marathon Petroleum. There's certainly nothing wrong with that as an opportunity to help protect you on the downside. Cushion the blow on the downside and allow you to reap those benefits, right?

Sean: Yeah, exactly.

Kenny: Give us another one.

Sean: Let's see. We also had Conoco. We also had Archer-Daniels-Midland Company (ADM)

Kenny: Archer-Daniels-Midland.

Sean: Right. Which, we did just because ... I actually entered that trade in March as Russian tanks were rolling into …

Kenny: Ukraine.

Sean: Right. Rolling into Ukraine. Normally, we like to do longer trades, but there was just a spike in this. We bought it right at the beginning of March and rode that up and sold that in late April, and we did really well. There are opportunities out there.

Now, to be sure, we are seeing fluctuations in all kinds of prices for commodities, including food. But look at the big trend in that. We have more and more people in the world, they all want to eat like big fat Americans. Some major sources of supply of grain are in real trouble. Ukraine, which is called the breadbasket of Europe for a reason, they can't plant this year. They really can't. Russia has its own problems shipping food out because it's under embargos for this, that, and the other. India, which is normally a wheat exporter, is now a wheat importer. There's stuff going on all over the place that's just going to interfere with food production. The longer-term trend in food prices is much higher.

Kenny: It's much higher. Archer-Daniels, so that people understand it, if you look up its official description on Bloomberg, it tells you that they procure, transport and store agricultural commodity products, right to Sean's point. Oil, seeds, corn, oats, barley, peanuts, wheat, everything that Sean's talking about in terms of the challenges that lie ahead.

Sean: We bought that one in December of last year, things looked good, and we just sold it at the end of …

Kenny: April?

Sean: No. We just sold that at the end of May. We got 34%. That's not bad for owning it just a few months, really. We like to make longer term trades in Wealth Megatrends. It's really one where you grow dividends. You keep grabbing yield over and over again. But the short-term trend turned against agricultural commodities and ADM went down. So, we are playing the big trend. Sometimes we have to get out because we don't want to stand in the way of that.

One thing people have to keep in mind is that we're in a market now where the Fed says, we'll see if they follow through, where the Fed says they're going to be removing liquidity from the market month after month. Now, we have a market that just increased in price because of all the liquidity that the Fed pumped in.

Kenny: That's right.

Sean: The Fed is pumping liquidity out. It's easier for the market to go down. That's the kind of thing we're actually dealing with now for those people who say, "You know what? This was a really sharp sell-off in the market. It'll be over quick." It might not be, but that's another good reason to own dividend paying stocks. I hate to sound like a broken record.

Kenny: No. But you're exactly right. Wealth Megatrends, the focus of Wealth Megatrends, just to reiterate the point, are these big companies that you look for opportunities, but ones that also reward you for holding them, by paying you substantial dividends.

Sean: They pay you to own them, which is a nice thing to have in this market.

Kenny: Especially now, and what's going to be, I think, for a while, a nervous and anxious market as we move, at least, through the summertime and we find out a little bit more about what the Fed's plans are. They're not right. The economy's going into a recession, is the Fed going to continue to raise rates? They're not. They're going to pull back. I think some people are betting on the fact that the Fed is going to blink, and I'm not sure they're going to blink.

Sean: I don't know either, but I can tell you this, the Fed's making everybody crazy, and so, alcohol sales should go up anyway.

Kenny: I think part of the problem, actually, if you want to know the truth, I think the Fed says way too much. I think they are "too transparent". I think they say way, way, way too much, and people focus on every single sentence. Remember, when you and I started in this business in the early '80s, the Fed was mute. They said nothing. They came out once a week, they said, "Here's what we're doing." They turned around. They walked away. They didn't take questions. They didn't ask you to come lie down on the couch and take a Xanax. Let me hold your hand. Are you OK? They did none of that, and the market functioned fine.

Sean: We had a guy, Greenspan, and he specialized in not saying anything while saying anything.

Kenny: That's right.

Sean: They used to look at the size of his briefcase to try and interpret it, how the rate hikes were going and stuff. Yeah, you're right. The Fed really talks a lot more than it used to.

Kenny: Do you remember that? Listen, there's a whole generation of people who listen to this issue, who don't know that, who don't understand that because it was called the Briefcase Indicator, right?

Sean: Yes.

Kenny: That's what they called it, the Briefcase Indicator, and only because he would walk in holding the briefcase. Now, either it was thick or thin. That was the only clue you had because he did not give a press conference. He did not take questions. He did not get everyone in a room and say, "OK, is everyone OK with this?" It's not what they did at all.

Sean: No.

Kenny: Which is very interesting. If you want my opinion, I think part of the volatility and the anxiousness today is because I think they say too much.

Sean: Right. Also, I think the market gets ahead of itself. It anticipates too much. If you're right, anticipation is good, but what if you're wrong? Then you have to run the other way, which makes the market more crazy and more hysterical. Right?

Kenny: Agreed. Which adds to the volatility. But it's exactly why the subscribers that you have to all your services, Wealth Megatrends, the Resource Trader to the Supercycle Investor. For the entry level subscribers that are in Wealth Megatrends, you really need to take a look at Sean's other products, because he goes more in depth. They are premium products, but they offer even greater upside potential and return, as well as more analysis. I'm hoping you get the opportunity, now, to listen to this interview and understand who Sean is and delve more into the products that he offers at Weiss Ratings. Because, like I said, at the very beginning, it is always a pleasure to speak to you, because I think you do such a great job. I learn a lot when I speak to you. And the fact that I subscribe too, helps me.

Sean: Good. You can probably hear my dog barking in the background because that's just the chaos at Chez Brodrick, I can tell you. I don't know whether she's angry at a squirrel or a mailman. It'll be one or the other.

Kenny: What kind of a dog?

Sean: She's a rescue. The vet says she's a Manchester Terrier. She was chipped and stuff, so we're not sure exactly what happened. But she's a great dog. She usually sits behind me here on the couch. She looks over my trades as I make them. They're Luna approved. The trades I put out are Luna approved, I can tell you that.

Kenny: There you go. That's perfect.

Sean: Anyway, it's always great speaking to you, Kenny, because you get so much excitement, so much energy. You make me feel good about my trading, so thanks very much.

Kenny: You're very welcome. What else is it that you could talk about for Wealth Megatrends that might get people excited?

Sean:

We still have energy positions in there, despite this big pullback we're seeing. How can I hold energy positions with the price of oil and gas coming down? The reason is the stocks we have, they have big fat dividends that are going bigger and fatter as the pullback happens. I know these things will be scooped up by investors when the turnaround comes, and we get paid to wait. We don't care.

We have a longer-term view. Yeah, we took some gain because it would be stupid just not to lock in some gains. But we're holding some other stuff longer term. That's the nice thing about Wealth Megatrends, even though I don't aim to over-trade in my other services, Wealth Megatrends, we really keep things really simple. Just a couple trades a month.

We are getting paid to hold through what I believe is a short-term pullback in oil prices, because the longer-term trends for oil and gas are very supportive of higher prices. All the companies are not investing as much in actually exploring for oil and gas the way they used to. They would rather return money to shareholders through either higher dividends or else share buybacks, that kind of thing. So, we're seeing a short-term pullback. That's why we took some gains, but we're hanging onto the others because the upside potential is so good and we're just getting paid to wait. So, I think that's actually going to work out quite well for us.

Kenny: Let me ask you a question, as we're just talking about the whole oil thing. Where do you stand on the refiners? Are the refiners in your network as well, or no?

Sean: We've owned refiners. We've actually taken gains on refiners. There's nothing wrong with refiners from an investment point of view.

Now, I do think there's some price gouging going on. I have a disagreement with much of Wall Street on this, but we have seen refiners choose to cut down their capacity.

Kenny: OK, that's also in my next question. Are they at full capacity, or are they cutting back on capacity?

Sean: Well, when you cut back on capacity, your remaining capacity is at full capacity. They're running those refineries at over 90%. Here's why that's a problem, because the longer you run refineries at their highest capacity, the more chance there is for a major snafu or even a disaster. Things can blow up. So, that's going to be a problem down the road, simply because they aren't reopening the old refineries. Now, I know that it's a pain in the neck to open an old refinery. Building a new one is even harder.

Kenny: Well, they won't build a new one now because they're so unsure about what future policy is going to look like. By the time they build it and spend all that money, they're not going to get a return on investment.

Sean: Right. They do have old ones they could reopen. They choose not to. This is the bind we're in. That and also, we export a lot of oil and gas now, but we also export gasoline through pipelines to either Canada or else Mexico. There's a lot of that as well. So, even though we make a lot of products here, we ship it overseas as well. This is one of the things that's just keeping prices at the pump higher for longer.

Now, we have seen prices come down as you and I talk, but they can go up again. That's the thing. There are so many things that can happen, so many things that can go wrong. The way the U.S. Strategic Petroleum Reserve is being drained, if there's no crisis, and there doesn't seem to be a crisis now, if there's no crisis, there's no way it should be being drained that much.

Kenny: There's no way.

Sean: It's obviously not helping gasoline prices.

Kenny: Agreed.

Sean: So, why are we doing that? That's just one of the things that really goes through my head when I'm lying awake in the middle of the night thinking about the oil markets.

But yeah, I think oil markets are going higher. My price target on U.S. light sweet crude is $138 per barrel. We got close to that. We didn't get there. I think we're going there. That's a minimum target. We can go higher. Now, at a certain point, higher oil prices, higher gasoline prices will impact the economy. It will cut back on what people spend. But when you look at things, inflation adjusted. We're all thinking about inflation now, aren't we? I know that I'm thinking about it when I make my picks because some picks are hurt by inflation, some picks are leveraged to inflation. So, keep that in mind as well. But inflation-adjusted terms, we aren't paying as much at the pump as we did, say, 10 years ago. So, there is room for things to go higher. I expect oil prices to go higher. I expect gasoline prices to go higher. Will that send us into a recession? I have no idea. There's a lot of different things that are all in movement across the board. We don't really know. Anyone who tells you they have certainty, especially in this chaotic market, is pulling your leg at this point.

Kenny: Well, I agree, and we've seen that oil price forecasts are all over the place. Citibank this morning is calling for ... They think it's going to collapse and we're going to $65 a barrel. JPMorgan, on the other hand, thinks it's going to $300. RBCs at $200. Goldman Sachs (GS), $150. So, it's all over the place in terms of where the predictions are. It's going to be very interesting to see which one of these big investment banks is right.

Sean: Right. We saw one of the heads of a German trade union saying that if they don't get price relief on their energy input, certain German industries are going to collapse. Germany's the economic powerhouse of Europe, so you would think that would be a big warning sign. It's just one of the many things that we have to take into account, which is, again, why stocks that pay dividends and raise those dividends are such a comfort to have in your portfolio because of the cushion they provide.

Kenny: Right. One last thing and then we'll jump. Tell me about coal stocks, considering we're talking about this whole energy issue. There's an article in the Wall Street Journal talking about how the U.S. and Europe is now turning to coal in this energy-starved world that we're living in.

Sean: Yeah. In fact, they're having more coal-powered energy production in Europe than they've had for quite some time. But you know what? I think I mentioned this to you earlier, that old saying of a friend of mine, when the paddy wagon comes along and takes the good girls downtown along with the bad, companies like Arch coal, stuff like that, they are just getting sold really hard. They are well off their highs. Does this make sense? I'm not really sure if it does or not. Maybe some people are thinking, "Well, there's a recession around the corner, so we won't need as much coal." I'm not really sure. But to me at this point, certain coal stocks look like bargains. They do.

Sean: It's just that I'm not in any rush to buy them right now either.

Kenny: I don't think demand for energy is collapsing. I just don't see it.

Sean: Me either.

Kenny: I guess if oil goes to $300 a barrel, then maybe it collapses. I just don't see how it can collapse because the world demands energy to function. Demand. You have to have it.

Sean: Right. I just don't see that either, and yet you have a whole bunch of coal companies are trading like the world won't be using coal anymore. That just makes no sense to me. So, maybe we can use this kind of thing to our advantage. I don't have any coal companies in the Wealth Megatrends portfolio right now. That doesn't mean that I won't in the future if I see a bottom.

Actually, one thing that might help this and a whole bunch of other commodity stocks is if the Federal Reserve decides to blink on raising interest rates, then you're probably going to see all kinds of commodity stocks just blast off again. So, that's something to keep your eye on. The Fed isn't blinking yet. If anything, their talk has only gotten tougher. But if it comes to the point where the Fed blinks, you're going to see a lot of things just blast off.

Kenny: Right. But it's going to be interesting to see if the market continues to spin out of control to the downside. Then I wonder if suddenly their talk is going to be a little bit more dovish.

Sean: Yeah, right. Exactly.

Kenny: And less hawkish. Right?

Sean: Yeah. There's certainly that potential out there. We've seen the Fed influenced by the market before. Remember the taper tantrum?

Kenny: Oh yeah, yeah, yeah. Very clearly.

Sean: Yeah. The last time the Fed tried to taper, the market threw a fit. The Fed said, "OK, we're not going to do that." So, the Fed is influenced by the market.

Kenny: They are, but I think now they're backed into a corner. When we were doing taper tantrum, the CPI was still sub 2%. The CPI is now at 8.6%, probably going higher, and they have to do something.

Sean: Well, here's the thing though, and I know they have to do something, but if a big part of inflation comes from Russia invading Ukraine, not only with energy costs but also food costs, how much will the Fed tightening its interest rates actually affect that? What it will do is slow down the U.S. economy. So, that will lower demand for oil and stuff like that that way.

Kenny: Right. See, I'm not in the camp that I think that the Russia-Ukraine war is responsible for inflation in this country. I think it might be responsible for a little bit of energy inflation, food inflation, but it was there well before Russia invaded Ukraine.

Sean: It is, but I'll have to send you a chart if I can find it where ... This was in May, I think. They did a computation of how much Russia's invasion of Ukraine actually affected certain things. It's actually surprising how much of that boosted things, not only oil, but wheat and nickel and …

Kenny: Who did the study?

Sean: It was some Wall Street bank, so you can take that or leave it.

Kenny: That's right. You got to be careful where you get your information from, right?

Sean: Yeah. Yeah, exactly.

Kenny: Anyway, listen. Sean, it's always a pleasure to talk to you. I look forward to doing this in another three or four weeks, catch up on new themes, new ideas, what's hot and what's not.

Sean: OK. Sounds good. Thanks very much, Kenny. I enjoyed this tremendously.

Kenny: Oh, it was a pleasure.

To your Wealth & Wisdom,

Kenny Polcari
Host

About the Editor

A professional trader since 1981, Kenny began his career with a decade as a trader on the floor of the New York Stock Exchange, ran a division of a major Wall Street bank, and built the U.S. equities business at one of the world’s largest broker dealers. 

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