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

of four tenths of one percent. Down Industrial is up a hundred and fourteen points, up six tenths of one percent, and has stack up twenty six, a gain of five tenths of one percent. The tenure down nine thirty seconds, the old one point seven two percent. Gold is down twenty cents, the ounce to twelve sixty nine. Little chains their crude oil forty nine seventy four for a barrel of West Texas Intermediate crude. It is up now by two point two percent. I'm Charlie Pellett. Thatat's of Bloomberg

Business Flash. You're listening to Taking Stock with Pin Box and Kathleen Hays on blue Bird Radio. Let's take Stock of Global markets with Hugh Johnson. He is the chairman and the chief investment Officer for Hugh Johnson Advisors, helping to manage more than one point to billion dollars in customer assets based in all the New York Hugh Johnson, welcome to the program, to be with you, Tim. All right, so are you gonna make some rational sense about what's

going on in the stock market. I understand that earnings are not great, So why would stocks be moving consistently higher? Well, they're not really moving consistently higher. That's one one observation I would make you know, if you look back about the last eight eight to ten weeks and they look at the S and P five, it seems to be really stuck in this sort of fifty on the low side, maybe ninety on the high side. We're not making much progress.

We have good days, utter point days on the upside, hotter point days on the down side, but we're really not making any progress. And I would say that the reason for that, PIM is the only explanation I can give, is that we've hit the hit the wall of overvaluation, and a lot of investors, especially sophisticated investors, are saying, under the current earning scenario, it's really hard to make the case for a significant move up in stock prices,

So something's got to give. Something's got to give. On the earning side, prospects for earnings have got to get a lot better before people will really step up to the plate at this level unless we get that outbreak of speculation. Is it because h that there's just not

broadly speaking enough growth for earnings to be stronger? Now we know, of course, in any economy, in any industry or sector, there are there are companies that grow regardless, right, but if you look at the fact that the economy in the first half grew went just over one GDP, that's not so hot. Uh, the second quarters a third quarter now, corny Atlanta fan is looking like just over two percent. If you have age those three quarters, you know, what do you have? Not a lot of GDP growth?

What is that? Macro kind of fundamental fact mean for companies were trying to make money and grow those earnings just exactly what you suspect. It's awfully hard. You know, we've had real good earnings growth until recently, and we've had real good economic growth, but everything is slowed down there. There are a lot of reasons for it. Number one, of course, is that the labor force is not is really anemic. The growth rate of the labor force simply

isn't there. Participation rate down, productivity is not doing what it should do. It's hard to make the case quite frankly, Kathleen, none of these conditions for anything but two and a half percent growth on the high side, as I look at it, we're looking at one and a half percent in the two thousand and sixteen and at best in two thousand and seventeen and eighteen two point three percent growth.

And so under those conditions, any any company that's trying to do business, uh, domestically, and there's not much going on elsewhere in the world either. Uh, it's really hard to make the case for strong revenue growth and strong earnings growth. It's just really tough to do that. You you mentioned valuation, and I'm wondering if you could just off for a little bit of detail, maybe even an anecdote, because you know, the concept of valuation can be very

amorphous when it comes to stocks. I mean, if I, you know, you went into a store and saw a banana and it was priced at twenty bucks, you you know, you'd recoil and you'd say, wow, that's that's just too expensive unless it's a I don't know, Golden Banan or something. But you know, like for example, Goldman Sacks. The stock is of four dollars today, a hundred and sixty six bucks to share. Uh, it's trading at a pe of

about eleven and a half. Tell people what that means in terms of valuation and how you view that, Well, you gotta look at it historically, and you have to if you look at the overall market. Uh. You there are two things that really make make the case for valuation, and one is earnings. And of course there we're talking about you know, as we've just been talking slow earnings growth. In fact, it will be down in two thousand and sixteen up maybe at best something like oh say one

and a half percent in two thousand seventeen. That's not much growth for the market or that. You can't really hang your head on that. So you just hope that the other side of the equation is for that given level of earnings, even though it's not very high, that investors will pay a high price for it. Tho those price earnings ratios will go up. While price earnings ratios unfortunately, our function of interest rates and we know the FED and we think, we suspect very strongly the Fed is

going to be raising rates. Other interest rates will be going up. Well, if interest rates are going up, price earnings ratios will come down a little bit. So you put those two things together. Earnings on the one side, you don't get much there. Price earnings ratios on the other side, you don't get anything there, and it might even go down. And you ask yourself the question. You scratch your head, what is it? Where's the beef? What's

going to drive this market higher? And unless it's speculation, you know, I'm I'm very puzzled, and I'm hoping for that I'm wrong. I'm hoping something happens and I can make the case for stronger earnings growth, but I can't do it yet, and I've been trying for three or four months to do it. And then, of course you have the Federal Reservice is going to probably raise the key rate once for the rest of the year, and then maybe a couple of times next year. It doesn't

really slow things down much. ECB may buy some fewer bonds. I guess here's the question. People say, OK, here's what twenty bases points fifty basis point. It's not going to make that much difference. But I guess maybe the again, if you think the fundamental changes, two big central banks becoming a little less stimulus. How much difference does that make to companies to investors? Not a lot at this level, Kathleen.

I think you understand that. You know, interest rates are banned at a lot historically low level for such a long period of time, and it's not going to make a big difference. It makes a little bit of a difference, a little incremental difference. I mean, there's just sort of a little bit less appetite or willingness or even ability to borrow money. But it's not going to be all that significant. It will slow a little bit, but not significantly.

But we're slowing from an already slow rate. And so how do you make the case first stronger earnings growth, stronger revenue growth under these conditions with interest rates rising, Well, it's it's it's it's hard to do. That's not good news that interest rates would be going up a little bit. It's not all that bad news, incidentally, but it's it's not particularly good news. And then, of course, on the fiscal side of things. Everybody's very worried about the deficit

and how big it's going to be. You know, every politicians talking about twenty tillion dollar deficits. If they start to move towards restraint, start to reduce spending, and you've got the Federal Reserve raising interest rates. Well, on a big picture basis, you've got a little bit to be concerned about. And let's let's keep in mind that this is that we're not in the early stages of this cycle. We're in the later stages this cycle, or at least the cycle is well along. I mean ninety one months

in the averages fifty seven months. So you know, um, it's just I'm a big buyer stocks. I'm a ball on stocks. I've been that way all my life. But right now I'm having a little bit tougher time making the case. Can you make the case from buying an energy stock like Exxon Mobile. I was looking at your comments about commodity prices. They have certainly risen consistently this year. Well, now that now you're getting right at it, which is you've got to find things that you know really haven't

done that well. If we take a look at the last two or three years. And obviously energy prices are oil prices being down, energy stocks not having performed well, they're catching up now, you bet. The question really is when we get to the energy sector of a portfolio. First of all, you've got good valuation metrics there uh, it's it's not overvalued. Other parts of the market may be overvalued. It's not overvalued. It's undervalued. That's number one.

So therefore you have to make the case for or you have to be comfortable that oil prices are gonna stay at current levels and maybe even move a little higher. I do a lot of work on oil prices, and I can make the case for the low fifties. Even moving up a little bit from there may be very volatile, but moving up a little from there it makes a real good case for an undervalued sector of the market.

And when you're putting together a portfolio and junia energy sector, make sure that under under conditions of rising oil prices you have exploration companies a company like x and would be a great buy, and also hedge that with a company like a refiner like Valero, which we own in all our portfolios. I owned personally. Valerio is not going to do well when rising prices are rising, but it'll give you a hedge in case we're wrong and prices oil prices go down. That's very complex, but the energy

sector is a very attractive sector. Technology who who could be? Again, you're not gonna picked by the whole industry, but you can say that's a company I can make some money on Apple. Apple. I I've set Apple so many times for so much, so often, and we've we've had obviously weathered some periods when there's a lot of skepticism about Apple,

what are they gonna do next? But when you take a look at the obvious metrics and Apple, when you take a look at their balance sheet and see the cash position, when you take a look at the cash that's being the cash flow analysis, when you take a look at the cash that's being errated. Even if and I think this will happen, even if the growth rate slows from something and let's call it a growth rate down to a four percent growth rate, and they don't come up with a genuinely new idea, you still have

such a large, powerful company. They can do an awful lot. They can raise dividends, they can buy stock back and it hardly will make a blip on their balance sheet. So I look at Apple and I think that's a company that, Yeah, I know I have to go through a lot of tough days with Apple, but I think the upside potential there is let's call it a hundred and forty dollars a barrel as we excuse me, barrel hundred forty a price uh target um over the over

a little bit longer period of time. You know, sometimes people think Apple does sell barrels of of iPhones, Hugh, So maybe your barrel idea for Apple is not a bad one. G Johnson, Chairman, chief investment officer of Hugh Johnson Advisors. He said it's getting very tough to make a case for the stock market to move significantly higher. A longtime bull, he says he can't quite do it, but he keeps trying. I'm Kathleen Hayes along with him. Fox. We're gonna come to the market clothes the movers and

shakers coming up on taking stock. This is Bloomberg. H