Why One CIO Is Waiting for ‘a Solid Panic’ in the Stock Market

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(Bloomberg) — The stock market has staged a ferocious rebound in the past week after almost falling into a bear market. Don’t get too excited about that, says Victoria Greene, founding partner and chief investment officer at G Squared Private Wealth.

Greene joined this week’s “What Goes Up” podcast to talk about why she doesn’t think the selling is over, and to give her perspective on the outlook for oil and energy stocks. Below are lightly edited and condensed highlights of the conversation. Click here to listen to the whole podcast, and subscribe on Apple Podcasts or wherever you listen. 

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Q: Do you think we’ve bottomed yet?

A: I don’t think we found a bottom yet. I just think we’re not done yet. I think this is a little bit more the first leg because I always ask, what is our catalyst, how are we going to get growth? You really haven’t seen a lot of earnings revisions. And so we talk about, well, valuations have come down. Yeah, the P part of the P/E has come down. What happens when the E starts to go back down too? There’s two parts to that. 

That being said, it has held — I just don’t think we’re done yet. I think this is more of a relief rally. If you look for the signs of capitulation — the 90% down days, the VIX spiking — we’re just not there yet. Yeah, cash balances have definitely increased and yes, we’ve seen some equity selling, but not a well and true panic. Not to sound like a snob, but I need a solid panic. We just haven’t seen that solid, absolute capitulation, everything selling off. We aren’t there yet. And then my concern also is, where is your growth. Margins are definitely being squeezed and we are going to have to wait until the Fed can send the economy into a recession to stop some of this.

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Q: Your firm is based in Texas. Does the energy industry influence your clients?

A: It probably makes them a little more bullish on the energy industry. But some of our clients, actually we run ex-energy because it depends on what their exposures are. So if you have a privately held company or you’re on a board of a public company, you’ve already got that exposure. So we’re actually trying to diversify and mitigate the concentration because everybody in Texas is well aware that the oil market is cyclical. So you ride up the good times, but you know there’s a flip side to it at some point. And this last decade has been super hard on the energy industry. We had like five crashes within 10 years. And so there’s just this weariness about, OK, yes, we are bullish energy and the energy transition, while ESG is coming and electric’s coming, it’s going to take a little bit longer to adopt. And we are seeing that play out here in 2022. 

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So probably I would say, not to generalize, but the attitude of a lot of our clients is that the death of energy was over-exaggerated. So not to say that there aren’t concerns about ESG or climate change or things like that, but it tends to make them a little bit more willing to have a foothold in that segment. So I do think it’s a little bit of what you know does influence what you feel comfortable investing in. You have the same thing happen in California — if you’re in the San Francisco area, you probably are very, very comfortable with your tech exposures and a little bit more comfortable with the early-stage and the small-cap tech and the innovators.

Q: Which energy companies do you like?

A: This goes into the greater theme of what’s happening in the world right now and the deglobalization. And as you may see, Russia removed from the market, you’re seeing all of this rebalancing of supply and demand and it’s hitting commodities harder. It’s not just energy it’s hitting. It’s fertilizers, it’s all of the exports and some precious metals, palladium. They’re a huge, huge supplier of palladium. And so you’re seeing this rebalance and shift and all of these things take a lot of time to redistribute and build up supply chains. So our base case is oil is staying elevated for the next 18 months. I don’t see it coming back down. I don’t see the demand crunch happening. Yeah, China, you kind of live and die by China some, but if you look at the travel and the consumption in the United States and Europe and where the trends are, most developed nations do not have a zero-Covid policy anymore.

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I know Covid is like a dirty word these days because we’re so tired of talking about it. But it’s still there. That’s what’s affecting China and Chinese demand. Chinese demand may also get a little messy because China and India have shown willingness to buy cheap Russian crude. Some of it’s geographically easy for them as well as that they can buy it at $30 and they’re concerned about their economic growth. So we may see some demand wane in China. But generally speaking, $90 to $100 a barrel for the next 18 months I think is distinctly possible. You have not seen this wildcatter mentality come back in. 

And then obviously we had the OPEC change. And so you saw this grand de-investment in the oil and gas industry. And even now we’re well, well below peak. We’re still well below pandemic-era oil and gas rigs out there. So you have seen oil companies — and you’ll see this theme in the oil and gas stocks that I like, the Devon, the EOG, the FANG (Diamondback Energy), and the Pioneer — they are US-based with a big footprint in the Permian. They have low break-evens and they’re absolutely pushing cash to shareholders. They are not putting it back in the ground. They are saying, ‘Thank you shareholders for trusting us. Here’s your money back.’ Like ‘Really sorry we didn’t make you money for a decade, but here you go. Let’s make some money now.’

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But you’re not seeing that wildcatter mentality that happened with other oil-price spikes because that would happen and you’d have this massive inflow of, ‘Let’s get more rigs out there,’ and just supply and demand would eventually flip it over. If you look at the slope of how the rig count has increased, it’s a much lower trajectory. Nobody’s really pushing a ton of money back into capex. So we love the stocks that are giving our shareholders just a better return right now — like Devon Energy at $100 a barrel is like a 16% free-cash-flow yield. They’re pushing out 50% of their free-cash flow in a variable dividend every quarter. You’re talking a lot of money to sit and wait, plus you might get price appreciations still because they keep making more money. And if you look at where earnings revisions are happening, about the only place that we’re thinking earnings are going to go up is energy. And so the P/Es there are actually still, even with this massive price moving up in a lot of these stocks, the P/Es are actually still very nominal and very value-oriented.

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