Let The Good Times Roll: Our Expert Weighs In On The Market

We’re smack dab in the middle of earnings season. And what a season it’s been.

Earlier this week, we got a slew of reports from the tech sector. The usual suspects (Apple, Amazon, Microsoft, etc.) released impressive results that kept the January mega-surge charging higher. But as the week passed, worries about the coronavirus seemed to weigh.

Meanwhile, today as I write this, the energy sector fell out of bed again. What was 2019’s worst-performing group is combining with global growth worries (and coronavirus concerns) to send U.S. markets tumbling. Spearheaded by troubling news of a glut in production from the likes of Chevron and Exxon, the Dow is down roughly 2%. (The suspension of air travel from major airlines and a declaration from the U.S. government of the coronavirus as a public health emergency are not helping, either.)

(Related: Here’s Why The Coronavirus Story Matters)

Here’s where I’m at with all this…

I’m absolutely thrilled to see some of my tech holdings soaring to new all-time highs this week. And, like everyone else, I’m wondering how much longer the bull market can go — and what’s in store for 2020. Also, the contrarian in me can’t shake this feeling that it may be time to wade into the energy sector.

To help scratch the itch, I decided to turn to one of our in-house experts: Nathan Slaughter.

We last talked to Nathan in November after the Federal Reserve cut rates. And now seems like a good time to get his thoughts once again…


Some of our readers may not know this, but you call the great state of Louisiana home. What’s it like there?

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Nathan: Louisiana is a welcoming state with warm friendly people. Known as the “Sportsman’s Paradise”, we love hunting and fishing and the outdoors in general. Of course, Cajun cuisine is a big part of life down here and we gather anytime for crawfish boils, food and music festivals, or just to cook up a big pot of gumbo or jambalaya.

The epicenter of Louisiana culture is LSU football. There’s nothing like Tiger Stadium on a Saturday night. We’re all still reveling in a perfect 15-0 season and another National Championship. Y’all should come visit – it’s Mardi Gras season. (Laissez les bon temps roulles!)

Where do you see the market going this year? Any potential roadblocks to this rally?

The market is usually tugged in different directions by various cross-currents. That’s even more apparent than usual this week.

On one hand, we’ve got fairly strong macro data… reasonable earnings growth, a full labor market, low interest rates, upbeat consumer sentiment. S&P companies are also flush with cash to support continued dividend growth and share buybacks. And we’re still feeling some of the stimulative impact of corporate tax reform vis-à-vis M&A activity and investment in new expansions and projects.

On the other hand, valuations are stretched in many sectors, and geopolitical wild cards (Iran, trade wars, etc.) could be dealt at any time. After last year’s powerful advance, traders could be looking for any excuse to take some gains off the table – and the Coronavirus may well end up giving it to them.

I’m not in the business of making big market timing calls. Hopefully, we can continue to grind ahead. If not, I look for companies that can prosper even when the economic weather cools.

Give me your take on the energy patch right now. It seems the activity in places like West Texas is higher than ever… But I’m always seeing headlines about a slowdown or bankruptcy fears among the smaller players. Any thoughts?

As you know, I spent five years writing an oil & gas and commodities-focused advisory. So I’ve had a front-row seat to the spectacular Permian Basin growth story. When I first started that post, this dusty, 75,000 square mile patch of land in West Texas and New Mexico was producing about 1 million barrels of crude per day.

That daily output hit 2 million barrels per day in 2016, 3 million in 2018, and currently stands at more than 4 million according to the EIA. That’s not just the most productive oilfield in North America, it has surpassed the famed Ghawar field of Saudi Arabia as the world’s largest oil producer.

There’s no denying that the Permian Basin is the heart of the U.S. energy renaissance. But as you mentioned, growth rates have begun to decelerate somewhat. That’s not unexpected. You can’t keep adding a million barrels of incremental production growth forever. Naturally, some in the financial media have seized a few data points, suggesting this prolific basin could soon dry up.

Don’t believe it.

They said the same thing decades ago until new extraction technologies made trapped shale deposits economically feasible to recover. Yes, it’s true that horizontal wells have faster decline rates, so more will have to be drilled to maintain production. We might also see a few weaker players culled from the herd, which is common in any industry.

There will be more negative articles. But if you listen to experts on the ground, you’ll hear a different story. Chevron’s President of North American Operations dismissed the idea of a slowdown, saying “we see a healthy pace of activity in the Permian Basin for decades to come.” And the company is putting its money where its mouth is, budgeting $4 billion in upstream CapEx spending in West Texas this year.

The biggest holdup has been a transportation bottleneck due to a lack of pipeline takeaway capacity. But new lanes to this highway will alleviate traffic. With that new infrastructure in place, analysts at Citigroup and elsewhere are forecasting Permian oil output will double to 8 million barrels per day by 2023. Much of that will go to thirsty export markets.

Far from depleting, the US Geological Society estimates that there are still 46 billion barrels of recoverable oil reserves sloshing underground below just one side of the Permian Basin – to say nothing of untapped natural gas and liquids (NGLs).

Ultimately, the amount recovered depends on the marginal cost of production to bring the next barrel to the surface. And drillers are getting smarter all the time, making breakthroughs in operating efficiency that have reduced breakeven costs to $40 per barrel in some cases.

There’s a reason why 60% of the industry’s entire M&A activity is centered in West Texas and New Mexico.

[Editor Note: See Nathan’s coverage of Occidental Petroleum (NYSE: OXY) here and here.]

What’s one piece of advice you’d give to a new investor who’s just starting out?

Don’t feel overwhelmed by the thousands of mutual funds, closed-end funds, exchange-traded funds and other investment vehicles out there. You can make yourself crazy (or worse, paralyzed by inaction) trying to evaluate them all to find the best options.

Sure, be cognizant of fees, strategies and performance. But studies have shown conclusively that individual security selection isn’t nearly as important as your asset allocation (how much you commit to stocks vs bonds, growth vs value, large-cap vs small-cap, and domestic vs international). Compound interest is magical. So the sooner you start automatically investing a set dollar amount each month, the sooner you’ll reach financial independence.

Thanks for joining us Nathan.

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