Rena Sherbill: So I think a moment of pause is good to reflect on everything that you’ve said and also the meaning behind it and the emotion and the feeling behind it for so many, if not directly involved. And as humans, just watching this all unfold, I think it’s all deserving of a moment before we get to the investment side.
Having said that, there is an investment side. What does this mean for investors’ portfolios? What does this mean? Like, do you see oil majors continuing to do well into the near future because of all these factors? What else would you say portfolio-wise as it pertains to investors?
James A. Kostohryz: That very much depends on which of these two scenarios we’re discussing. I’m not gonna really discuss the scenario where the war is concluded very quickly and the straight of war moves gets back to normal in the next couple of weeks. That’s obviously possible, but I don’t think it’s likely.
So I’m really gonna focus on the two scenarios that I laid out earlier. The type of scenarios where we have either a 30 % bear market or a 50 % bear market.
Now, you mentioned oil stocks. So here, for example, we have some of the majors and then we have some of the more E&P producing stocks. These stocks will do very well in either of these scenarios, but certainly much better in the second scenario because the value of any stock has to do with the cash flows going out into the far future.
And the longer that this disruption lasts, the harder it is going to be to bring back production in the future back to the level that it once was. And it also means that global inventories are going to get so run down that what’s going to happen is that after the war, the strategic reserves and the commercial reserves are going to have to get built up back to normal.
So not only will you have the normal amount of let’s say global demand that will need to be supplied by a oil infrastructure that’s going to be damaged. In other words, it’s not going to be possible to get oil production in the Middle East back up to where it was a month ago right away.
It’s probably going to take at least six months to get it back to where it was if the war ended right now. But as this drags on, if this lasts another four weeks, we’re looking at the prospect that oil production really won’t get back to where it was until sometime in 2027, excuse me, sometime at the end of 2027.
And the projection for, and that’s just to get it back to where it is right now. And of course demand will continue to grow. So likely in this type of a scenario, we’re talking about oil in excess of a hundred dollars beyond 2027, right?
And right now, if you look at the futures market, December 2027 futures for WTI are only pricing in like $71 oil. Okay, and it’s only pricing about $77 oil for December of 2026. So there’s a very, very optimistic set of assumptions that are currently built into the futures curve in the oil market, but that is very, very quickly gonna change unless this conflict is actually resolved very soon.
And so if we start seeing the prospect of prices at 90 or $100 out to 2027, then all stocks are still gonna, even though they’ve gone up a lot, still gonna be some of the best investments in the market. If the war would be over today, I would say that most of these stocks are probably about fairly valued right now aside from the fact that they would probably actually go down in price just as a reaction.
But fundamentally speaking, they’re probably about fairly priced right now given what the futures market is indicating in terms of future oil prices.
But if I’m correct in my scenarios, then it means that the futures market is gonna have to reflect much higher oil prices. And in that case, the upside is really high, especially in the E&P sector. think that if we’re looking at 90 to 100 dollar oil at the end of 2027 and beyond, a lot of these stocks can really double from here.
And there’s quite a few stocks that could actually triple, quadruple, quintuple in price. But there you’re starting to get into individual stock picking and understanding specific stocks and the ones that could do better in these scenarios. So I won’t go into necessarily that here.
But I am saying that in the E&P sector, if you have the more bearish scenario where you think that the war is going to last a bit longer and that oil price and that therefore oil prices are likely to be in the 90 to 100 or even beyond $100 after 2027, then that’s a very, very attractive sector for people to be looking at.
Now, again, if you’re more optimistic about when the war is going to end, let’s say in the next week or so, then you should probably take your profits right now in all your oil companies and sell them.
If you believe in my intermediate scenario to four to six weeks out, I still think that the stocks still have significant upside. Here we’re probably talking about 30 to 50 % upside in that type of scenario for some of the, let’s say, some of the major oil stocks and some of the major E&Ps.
But in the case of some of the other international E&P stocks, if we’re still in that scenario of four to six weeks and this war is over six weeks from now, we probably have a double in a lot of those stocks. In other words, upside of a hundred percent in some of those stocks.
Because in a scenario like that, oil prices are still gonna be significantly high in the future because of the difficulty of bringing production back due to the damages that’ll be done in the next six weeks. So that’s definitely one of the sectors to try to really understand.
But to understand these different scenarios that I laid out and depending on which scenario you believe in, that’s how you should act in your portfolio relative to those sectors and the weightings and so forth. We are aggressively positioned in E&P.
We’re especially aggressively positioned in non-North American E&P stocks, E&P stocks that have their assets outside of North America, also stocks that don’t have their production anywhere in the Middle East that could be impacted by this situation.
And so we see a lot of potential there. Another area that I think there’s a lot of potential, and again, it’s going to depend on how much damage is actually done from where we’re at right now, is natural gas producing stocks that are involved in the LNG market.
Those stocks, I think, can do extremely well, particularly if there’s any more damage done to LNG export capacity out of the Middle East. we have some more damages than what we’ve had already, then a lot of these stocks could do extremely well because that damage is long term.
And not only is it long term in terms of production facilities, a lot of people, a lot of international clients, rather than buying oil in the Middle East that has to come through the street of Hormuz, they’re just going to say, you know what, it’s not worth that kind of risk. We’d rather buy this from American companies in the United States.
And so that means that a lot of these companies in United States are going to have a lot of really profitable future growth to look forward to. I would say that there’s some optionality involved for some of the stocks in the US that are involved in the LNG sector, producing LNG, processing it, and that have capacity export. Let’s talk about a few other sectors here.
Rena Sherbill: Can I ask you, before you get into other sectors, can I ask you, you were talking about (BNO) last time you were on. What would make you get out of BNO?
James A. Kostohryz: Well, that one’s gonna be extremely sort of news driven, right? So if there were an announcement that an agreement was either had occurred or likely to occur that led to a ceasefire and the war sort of winding to a close and no more blockage of Strait of Hormuz, which seems almost ridiculous at this point, but let’s just assume that happened tomorrow or that I was sniffing and I thought, you know what, this might happen in the next few days.
I would definitely get out of BNO because I think crude will definitely crash. It’ll probably crash down. It’ll probably overreact.
I think crude (CL1:COM) at this point is a good bet that it’s going to stay average over $80 probably for the next couple of years, even if the war is over tomorrow. But I think it could definitely crash below $80 really quick if there were some sort of announcement.
Right now I have what I’d call a core position. I trimmed that core position as soon as WTI hit around $100. And the reason is that I think that the administration is going to do everything it can to try to keep WTI below that $100 threshold just because it’s psychologically, I think, very important. But they can’t really hold this down for very long. So I think I still have a core position.
And I think that, as I said before, we’re likely to start moving up towards the $150 to $200 barrel in my, let’s say scenario where this war is gonna last another four to six weeks. And we’re kind of gonna know that probably in the next week or so, right?
Because President Trump essentially gave the Iranians a deadline. He’s already extended it a couple of times, but it’s getting to the point where if they don’t come to an agreement, as I mentioned before, they’re gonna have to face the likelihood of having to perform ground operations.
And those ground operations are gonna last a while, right? So that means that we’re again gonna be four to six, you know, we’re gonna be six to eight weeks away. And during that period of time, the shortages are gonna become so acute in the global economy that Brent (CO1:COM), which is today I’m just going to look at what price Brent closed at. I think it was about a hundred. Let me just take a quick look here.
So WTI right now is at about 105. This is the front month future contract and Brent at about 108. you know, Brent can easily go, which is, you specifically mentioned BNO, which is based off of the Brent benchmark. And I actually do recommend that benchmark more than I do WTI.
It can easily get to $150 and beyond. So I still think that the risk reward there is pretty attractive because again, if we get good news, we probably crash down to $80 and a little bit below. But let’s say a person could stop out probably before it got below $80. So you’re looking at 15 to $20 downside, but you’re looking at more than a $50 upside.
So the reward to risk profile there even though this is a very risky investment, I still say it’s very good. And I have a significant core position there and I’m actually willing to add to it. If we don’t see having signs of progress during the course of this next week, I think I’m to probably double my exposure to crude oil through BNO and some other potential instruments there because I just think that the scarcities are very real.
The oil market has a speculative component to it, but it also has a pure supply demand component. And at some point you get into marginal demand bidding where people that just need oil, if there’s a shortage, they’ll pay whatever price in order to get that oil.
And we haven’t reached that point of crazy pricing yet because most places in the world still have some strategic reserves, but those strategic reserves are starting to run really, really low in a lot of places in Asia already.
They’re going to start running low in certain places in Europe. And as we go further and further, we’re going to start getting to that crazy bidding by marginal players, marginal demand players that just require oil at almost any price.
So to answer your question, I still like BNO in a core position, although I think it might be susceptible to a pullback here on some good news about negotiations or job owning or whatever you want to call it.
But then once we look out, if we’re still involved in this war, you know, a week or two from now, I think we’re heading to 120 and well on our way to 150 or above in my scenario of 68 weeks more of fighting before the objectives are accomplished.
Rena Sherbill: I appreciate that. Happy for you to get into other sectors.
James A. Kostohryz: One of the other sectors that I think we should all talk about here, very important is bonds.
Even if you don’t invest in bonds, it’s a very important to understand what’s going on in the bond market.
Because one of the most dangerous things that’s happening, and a lot of investors are probably not paying enough attention to it, is that bond yields have been rising. The 30-year Treasury yield has risen, is getting uncomfortably close to 5%.
And just above 5% is as high as the 30-year treasury yield has been in something like 20-some odd years. If you start getting that 30-year yield to 5% and above, it starts choking off the US economy.
And so it’s very important that people actually start really following that yield on their screens if they aren’t already. And I suspect that most of your readers probably aren’t necessarily following that, but very, very important to do that.
Now, it’s very important to understand what’s going on here and separate the bond yield between what’s called the real yield and the inflation expectations component of the yield. The inflation expectations component of the yield is what it of sounds like.
It’s how much inflation investors are implicitly pricing in will occur over the course of the next 30 years. Let’s say if it’s a 30 year bond yield or if we’re dealing with a 10 year bond yield, it would be for the next 10 years.
Those inflation expectations, interestingly, are actually still very low. other words, investors are right now are thinking inflation is going to shoot up in the next year, but then inflation is just going to head back down to 2%. And therefore the very long term prospects for inflation are still very bullish and the market is actually very calm about those long-term inflation expectations.
Those long-term inflation expectations haven’t really gone up very much. What’s actually very concerning, Rena, is that the real yield component of bond yields has actually risen to record levels from the last 25 years.
And that is actually a huge problem. Because it’s the real yield that’s actually more important for economic growth than any other yield and any nominal yield it’s really the yield that tells you about the tightness in the financial system and it’s the one that poses the greatest risk to the economy that real yield has risen to dangerously high levels and one of the things that’s going on there is that if this war continues it’s going to put a big fiscal strain on an already very fiscally strained United States, let’s say fiscal and debt situation.
As you know, the United States is carrying a very large debt and it’s also carrying a very large fiscal deficit. If we have a recession and at the same time we’re trying to pay for a war, the deficit is going to explode to record levels and the debt is also going to explode upward.
And that kind of a concern is actually being reflected in the real yield. In other words, investors are demanding return above and beyond their inflation expectations, which is really, really high compared to what they’ve been demanding in the last 20 to 25 years.
And if that real yield continues to go higher, it’s really, really bad news for the economy. And I encourage people to watch that closely. If we start getting the real yield yesterday got up to like 279, it was down a bit today. If that gets up to 3%, that’s a big alarm level right there.
And to either look at as potential resistance to potentially try to take advantage of that and buy some bonds, or think, you know what, if you don’t think it’s going to stop there and go beyond that, that’s a time to really, really then start hitting the, I would say, sell buttons because then the economy is going to be in really big trouble.
The main instrument that investors or that I like to use to focus on the real yield is tips. Now there’s various instruments in the market that track tips and that track tips of different duration.
One of the products that I use in my service for holding long-term tips of duration of 25 years and more is a product called (LTPZ). And it’s something that it’s actually worked well for me in the future, excuse me, in the past. I sold that out of my portfolio a few weeks ago, but I think that if we get a real yield up to, let’s say, 3 % range, I’m gonna very, very seriously consider buying a big chunk of LTPZ at that point.
The reason is this, if you can get a 3% real yield plus whatever inflation happens to be, in other words, if inflation is 3%, 5%, even 10%, the TIPS are gonna pay you that inflation rate plus the real yield of 3%. So you get 3% plus whatever inflation is, you’re completely protected in terms of what inflation is gonna be in the future.
That’s actually a very attractive return even compared to stocks at that point. In other words, if you get a 3% real yield plus inflation protected return of let’s say another 3%, you’re talking about a 6 % return, it’s hard to find stocks that are going to return 6% between dividends and capital appreciation over the course of the next couple of years.
So I think that TIPS (TIP) and basically you’re taking virtually there no risk here because you don’t have any inflation risk and you don’t have any repayment risk in in TIPS.
Now you do have a capital appreciation risk and that’s the second part I’m to mention here which is that if real yields went higher you might be suffering an unrealized capital loss there but the flip side of it is this if the real yield goes from % down to about 2% which is where it was before all this, you’re looking at a potential capital gain there in the order of about 20%.
And if we end up having a serious recession and TIPS behave as they have in the past where the real yield and the recession generally goes down to about 1% or below. Let’s just say it went down to 1%. We’re talking about a gain of 40 to 50 % in terms of a capital gain on these long-term TIPS plus your real yield plus your inflation protection there you have, basically what you have there is almost a dividend stock where you’re gonna be paid possibly 5% dividend yield, maybe 6% dividend yield between the real yield and inflation, right? Five to 6 % yield.
And then you have a potential capital gain, as I said, of somewhere between 20 and 50%. I mean, it’s hard to beat that in terms of relative attractiveness, especially considering that it’s far less risky than stocks. So I wouldn’t be a buyer of long-term tips here, but I’d definitely be on the lookout for them.
if we hit that real yield of 3%. In terms of more nominal bonds, still think that treasuries might look, they might look attractive at if we have real yields of say 3 % and let’s say the nominal bond yield might be up to 5.5 % or even a little higher.
But I just think the tips are safer because we could get an inflation scare and if you get an inflation scare and you’re holding nominal treasuries, you’re going to get brutally beaten up.
Whereas if you’re holding TIPS, you’re not, because TIPS are by definition inflation protected. So that’s what I would say in terms of bonds.
I wouldn’t touch corporate bonds here pretty much with a 10 foot pole, because not only do you have all the risks that you have in treasuries, you have a risk that spreads are going to blow out here. So I would definitely not hold any corporate bonds in my portfolio whatsoever unless it just happens to be very special type of situation.
Let’s move on, talk a little bit about gold (GLD). Perhaps this is an asset that I think a lot of people always think about in terms of when there’s some sort of a crisis going on economic crisis they’re wondering whether they should own more gold, whether they should buy gold, etc.
I think that anybody who purchased gold has been extremely disappointed in the last few months because gold has actually gone down significantly in price since the war started, which is probably opposite of what a lot of people were expecting.
But it’s nonetheless something that I’ve warned about on this show of yours in the past that I felt that gold was extremely overvalued and therefore vulnerable to a decline. And in particular, there’s a couple of reasons why I think gold has sort of crashed here in the last few weeks.
The first simply has to do that a lot of people hold their savings in gold and if they need access to liquidity, and that’s happened obviously in a lot of places in the Middle East, people that need access to liquidity, if they have some of their savings in gold, one of the first things they’re gonna sell is that gold because it’s what, they’re able to sell that.
If they try to sell, for example, stocks or bonds that are extremely depreciated, or let’s say if you’re somebody that owns apartments in Dubai and those apartments are down 30 % in value and you can’t even sell them right now because the market’s a liquid, you’re going to sell whatever you can that you can and gold is a very liquid market.
So you have some people that have been liquidating gold for that reason. Central banks have been liquidating gold because a lot of central banks are all of a dealing with the fact that they’re going to have major trade deficits because the price of oil, if you’re an oil importing country, all of a sudden your oil bill is going to be a lot higher and you’re going to need hard currency in order to purchase that oil.
So that’s putting pressure on some several different global central banks that are actually sellers of gold. As you know, one of the main reasons that gold has been rising is that global central banks were net buyers in a big way in the last few years, but that has turned around pretty dramatically where you now have several global central banks that are selling into this really high gold price, taking advantage of the strength of the last couple of years and basically dumping their coal because they know they need to have cash on hand to essentially protect the currency.
Because again, if you’re an oil importing country or if you’re importing any of the materials that are going to become scarce, your currency is going to be in trouble and you’re going to need that liquidity. So they’re kind of dumping gold and that’s one of the other factors that’s impacting gold here.
Again, whether you want to invest in gold going forward, it depends a little bit on which scenarios that you’re dealing with here. If you’re dealing with the scenario of let’s say, particularly the scenario of let’s say six to eight weeks, I would say that there’s going to be continued pressure on gold because there’s going to be liquidation both by individuals and central banks.
I think the price of gold will continue to be pressured in that case and we’re probably going to see lower lows in gold.
In the event that we have the more severe scenario where we’re looking at multiple months and gold prices going up above $200, I think that’s a more bullish scenario for gold in the long term, but gold will probably again, it’ll probably dip well below its more recent lows. I believe it’ll dip down well below $4,000 before it might actually start to rise again based on long-term inflation expectations.
In other words, as I mentioned a little earlier, long-term inflation expectations right now are quite tame. But once we start getting into the prospect of a war that might go beyond this six to eight month period, and we’re talking about several months now, then we’re talking about the risk of long-term inflation being a lot higher.
In that type of a scenario, gold, should actually perform better because it’s a hedge against long-term inflation. In fact, gold generally trades as a function of long-term inflation expectations as opposed to short-term inflation expectations.
And by the way, I forgot to mention, but the number one thing that tends to move oil in the short-term is real interest rates. And one thing that I think a lot of people didn’t notice is that real interest rates rose and when that happens, gold generally goes down.
So one of the factors that’s actually caused gold to go down is that real interest rates have gone up. That’s something that I talked about when I talked about bonds.
And that could continue to happen, as I said, as a result of the fact that if the United States is in a situation where it’s gonna be having to pay for a longer war, and it’s also gonna have a recession where revenues are gonna go down, deficit and the debt are going to explode and that’s going to put pressure on long-term interest rates and that could also put pressure, downward pressure on gold on the price of gold.
I personally wouldn’t touch gold at a price of much more than let’s say thirty five hundred dollars or so. I think that gold is overvalued even at four thousand dollars, I think it’s likely to go below four thousand.
But once it goes below four thousand, I think it’s at least viable to start looking at it, particularly if you are thinking about the more bearish scenario that I mentioned of a multi-month war.
So that’s where I would say with gold, obviously, everything I said right now with respect to gold would apply to gold miners. There’s no reason to own gold miners unless you think gold is going up, really. There’s no reason to own gold miners if you think that gold or gold prices are gonna go down, you shouldn’t own them.
If you think they’re gonna go up, then you should own them. It’s just that gold miners are generally a high beta play on gold. When gold goes up by a percent, gold miners generally go up by about a percent and a half. And when gold miners go down by a percent, gold miners actually go down by 2%. So it’s actually an asymmetric bet with some downside bias there.
But certainly if you’re really bullish on gold, then you want to be involved with miners because you’re probably going to get a one and half times return, whatever the price of gold kind of goes up. As I said, I wouldn’t be touching that either gold or gold miners right now because I still think the gold price is overvalued at this particular point in time.
Rena Sherbill: I was going to ask about the US dollar.
James A. Kostohryz: The US dollar (DXY). I mean, this one is also this one’s a tough one, right? Because even though the US is going to be facing a bad situation in terms of its debts and deficits, everybody else is too, right?
So when we’re talking about the dollar, we’re talking about pricing the dollar relative to other currencies. And the United States, after all, is a net oil exporter. So from a current account perspective, the United States current account will actually improve from that point of view.
And also in a recession, we know that the US current account improves. So the US dollar could actually strengthen pretty significantly if this crisis drags on.
And that would also obviously be a negative for gold.
So again, I would say bullish US dollar if you’re more bearish on the war situation. If you’re less bearish on the war situation, you think it’s going to be over soon, then I think the prospects are that US dollar might come in a bit and have a nice little pullback.
Some other things to maybe think about would be industrial commodities. If we’re talking about the prospect of a global recession, watch out. I think a lot of people are getting excited about the shortages that might start appearing in some materials like aluminum.
We heard about the fact that an aluminum plant got bombed the other day and that could crimp global supply. In addition, all the aluminum coming out of that part of the world is currently backed up because it can’t get through the Strait of Hormuz.
Copper mining depends on materials that actually come out of the Middle East. And so it can actually impact the volumes there. I think that all that’s kind of missing the point, which is that if we have a global recession, we’re going to have a big decline in demand for industrial commodities.
Therefore, I think that the prospect for a lot of the industrial commodities, particularly aluminum, steel, copper, and so forth is actually quite negative. And the more bearish you are about this war scenario, the more negative the scenario is gonna be for those commodities.
And certainly for the producers of those commodities, because not only is the price of their commodity gonna go down, their input prices are gonna go up, especially the price of fuel. And these are very fuel intensive industries.
So when the price of fuel goes up, their margins are going to get hugely squeezed because at the same time, the price that they’re getting for the product is going to fall.
So I will be very cautious about buying mining stocks in the industrial metals space, like aluminum and copper and some of the other ones, iron ore and so forth. I’d be very, very wary of having stocks in those particular sectors.
Agricultural commodities, I think there’s prospects, as you’ve probably heard. The spring planting season looks like it might come and go and there’s not gonna be enough fertilizer in certain parts of the world.
So the yields on crops and just the sheer volume of product that’s going to be produced in certain crop categories like wheat, it’s likely to be severely curtailed.
And so I think there’s going to be some speculation in those markets and we could have some boom type pricing in a couple of these markets in the event that we actually have this big decline in yields and even just decline in acreage planted.
So that’s an area where people who are specialists and people that have knowledge of this particular area can look into for retail investors. There’s not really a great place to really play this because even though there’s some ETFs that hold agricultural commodities, I don’t necessarily recommend messing with those because the contango that you have to deal with in those particular products is something that causes them to have a big decay in value over time, even if the price doesn’t move at all.
The contenders are only gonna get worse here because it’s the future price that’s actually gonna rise rather than the short-term price. And so the decay is actually gonna be even worse.
So I would definitely not recommend that investors mess with some of these products that invest in near-term, agricultural commodities futures like wheat (WEAT), or corn (CORN).
Some of these, there’s several of these products of this particular nature. I wouldn’t mess with it. If you’re actually somebody who knows about agricultural commodities, how to invest in that space, you probably wouldn’t be buying that anyway. You’re gonna be investing in the futures. And so that’s not something I think I’d recommend most people sort of mess with.
There’s some other ways to play the agriculture. There’s John Deere (DE), but again, they have a lot of industrial demand, so they’re going to get hurt as a result of this. So it’s not clear that they’re going to be a net winner, even if agricultural commodities prices go up.
There’s a stock that I’ve owned over the years that I like a lot. It’s an agricultural commodities trader that has the symbol (BG), it’s Bunge Group. They might do well in this particular environment. And again, if you know enough about the sector, it’s a stock to at least look at.
There’s some stocks that there are going to be some big issues going on in terms of the world of agriculture, but it’s not something that’s necessarily super easy for a retail investor to take advantage of because there’s just not that many stocks or let’s say investment alternatives that are available to retail investors to really sort of capitalize on this properly.
I guess the final thing that I would just mention because we’re probably way over my allotted time here would be tech because a lot of people have exposure to tech.
Tech overall, over 40% of the S&P 500. So hugely important sector. How’s it gonna do in this environment? Well, again, there’s no such thing as tech in terms of a monolith. There’s obviously gonna be some stocks that might have some serious problems if they, for example, are relying on helium, some of the semiconductor producers, you need to really understand where your company is sourcing its inputs to understand how it might be impacted here.
And that’s literally a stock by stock investigation. So if you are an owner of these stocks individually, I really recommend that you figure out how those specific individual stocks, because some of them may not have their inputs impacted very much at all, in terms of because of where they’ve sourced them and maybe if they’ve also hedged them in advance and so forth using the futures market and other ones are going to be very severely impacted.
So that’s something to kind of look at. More generally, I think that if we’re dealing with a recessionary scenario, all these companies are going to have less cash flow and they’re going to end up having to cut back on AI investments.
A lot of the projected capital expenditures on AI are probably going to tick back. And that’s of course going to affect the whole sector because a lot of valuations in the tech sector are dependent on rosy projections about growth, AI driven growth in the future.
But that growth won’t necessarily be there if everybody’s forced to cut back on CapEx. The other issue here is that it might just be harder for some of these folks to get credit. think that conditions, liquidity conditions are going to be far more constrained for reasons that I mentioned earlier and interest rates are going to be higher.
So we’re already seeing examples of this in the private markets where it’s harder and harder for some of these companies to actually fund their projects, particularly projects that are gonna be really cashflow negative for a couple of years. I think it’s just gonna be a lot harder for people to fund.
And as a result, the expected growth rates of a lot of stocks that are heavily dependent on prospects for AI driven growth in the future, I think that is gonna get impacted pretty significantly by this crisis if we get into the more bearish scenario of war lasting more than let’s say eight weeks and having these global disruptions for eight weeks. If it only lasts six to eight weeks more, I think everything is going to get hit.
But I think that tech will actually do fairly well on a relative basis because really one of the things that I think you know and your readers know is that tech actually hasn’t been performing all that well in the last few months. In fact, most tech stocks are actually down over 20%.
Certainly the median major tech stock, the MAG-7 and so forth, they’re down more than 20 % on average and in terms of median. Whereas the market is only down about, I think, 7% at this point.
So these stocks have actually already come down quite a bit. Whereas there was a big outperformance of cyclical and value stocks right before the crisis. So I think those stocks are actually more vulnerable.
I think we’re going to have bigger declines in cyclical sectors, economically sensitive sectors, and therefore value-oriented sectors, because a lot of these cyclical oriented sectors also happen to be value stocks.
That’s not always the case, it tends to be the case that value indexes are very heavily weighted towards cyclicals. So I think that you have to be careful because value can mean a lot of different things.
But if your value is cyclical, then I think that’s gonna potentially do very poorly, particularly if you’re bearish regards to the war. And I think tech will actually outperform those stocks, even though I think everything is coming down if this war, as I said, lasts the six to eight week period that I’ve mentioned, and certainly if it goes beyond that.
I think obviously sectors that a person might want to look at are the more defensive sectors. But a lot of those sectors are not really very attractively priced at this point. So it’s a matter of saying, well, if you go into those sectors, it’s just gonna go down less than everything else, but why do that?
In other words, if you have the flexibility, you’re better off holding cash rather than just buying something that’s gonna go down 15 % rather than 25%. So that’s what I would say. Now, a lot of people that like to remain fully invested and don’t like to hold cash, they can do that type of rotation, but I’m definitely not a fan of that.
I think that if you have conviction, if you actually think that this war is going to last for at least another six to eight weeks as I do, you should aggressively move to cash.
You should aggressively potentially move to some of the sectors that I’ve highlighted could do well here, but definitely move out of pretty much every sector of the market outside of energy.
There’s some other stocks, there’s some engineering and construction stocks that are going to get a lot of work in the rebuilding efforts, if they happen to be positioned correctly, their businesses are positioned correctly for the post-war environment.
I think there’s some stock picking that can go there, people that can benefit. But for the most part, we’re looking at a situation where the market is probably gonna be going down 12% from where we are today, at least if this war outlasts another six to eight weeks and it could go down another 40% or more from here if this war goes multi-months.
So my thing is I would say really be thinking about being defensive for most people. And if you’re more like what we’re doing in my successful portfolio management, we’re way up for the year. We’re up well over 40 % for the year so far.
And we’re going to continue to go up if my predictions go true. But that’s because we’re aggressively investing in crude. We’re investing in E&P stocks, particularly ones that I mentioned that are international.
And we expect our portfolios will actually go up a lot. I mean, we’re talking about a lot if my scenario actually plays out. But if you’re just defensive and you’re just worried about the situation, you don’t want to take risks, then he best thing you can do right now is raise cash.
Don’t go into long term bond funds that have high duration bonds, because those, as I mentioned earlier in the bond segment that we discussed, I mean, those can get hit. So if you’re going to go into a bond fund, it needs to be very, very short term bonds.
But for the amount of yield you’re getting, you’re better off just doing a money market fund where you can get it yield similar to what you’re going to get into any kind of a short-term bond fund.
So just go into cash and when I say cash, I mean money market fund, a high yield savings account, and look for some opportunities that might arise.
If you happen to agree with me about the timeline of this war, you’re going to be seeing a lot of stocks that are a lot cheaper that you’re going to be able to buy 15, 20, 25% lower in the first of my scenarios and in the second scenario you’re going to be able to buy stocks 40% cheaper than they are right now.
Rena Sherbill: James, I appreciate it, appreciate you always being so generous with your time and your thoughts with us. Your investing group is Successful Portfolio Strategy for those that are interested and feel compelled, which I believe you would be after listening to James’s episodes and reading his articles, check out Successful Portfolio Strategy on Seeking Alpha. James, thanks again for the conversation. Talk to you soon.
James A. Kostohryz: Thank you, Rena.
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