Vahan's Views: Markets, Rates, Energy, and Utilities

12/14/2015 10:00 am EST

Focus: ETFs

Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

A long-standing stock expert, Vahan Janjigian is willing to go counter to conventional Wall Street thought. The editor of Bottom Line's Money Masters Stock Report discusses his contrarian assessment of economic concerns, interest rates, insider activity, as well as the energy and utility sectors.

Steven Halpern: Our special guest today is Vahan Janjigian of Money Masters Stock Report.  How are you doing today, Vahan?  

Vahan Janjigian: Very good, Steve. Thanks for having me on.

Steven Halpern:  In your latest economic review, you suggest that while there may be a manufacturing recession, you don’t have a similar concern for the broader economy. Could you expand on that outlook?

Vahan Janjigian:  Yeah, actually there are a couple of reasons.  When I say that there’s a manufacturing recession, I’m talking particularly about the ISM Manufacturing Index which is now below that critical level of 50.  Any number below 50 means that there’s a contraction or a recession going on in that sector.  
We know that the manufacturing sector is not doing well right now. However, it’s only one month that has fallen below that critical level of 50 and we’ve seen many times in the past that this number goes below 50 and then rebounds, so I wouldn’t be too concerned unless it remains below there for two or three months in a row.  

Furthermore, manufacturing is really only 12% of GDP, so the services sector is really more important, and when I look at other parts of the economy, I’m seeing GDP numbers are actually pretty good, they're weaker than they should be, but they’re still positive and non-farm payrolls have been pretty good, so I’m really not that concerned yet that manufacturing may take us into an economic recession.

Steven Halpern:  The market for quite a while appears to be obsessed over a potential rate increase.  Now you recently said that a quarter-point raise hike could actually be viewed as a positive for both the economy and the markets. Could you expand on that?

Vahan Janjigian:  Yeah, I think there are really two reasons for that.  First of all, if the Fed refuses to increase rates, it must be because the Fed thinks the economy is in terrible shape. A rate increase would convey the Fed’s confidence that the economy is improving.  On the one hand it’s a signaling mechanism.  

The Fed is telling us that things are getting better and that’s why they’re confident to raise rates, and secondly, one of the things we’ve noticed ever since the great recession is that banks are very reluctant to lend money except to the highest quality companies, so unless they’re willing to lend money to smaller businesses, we’re going to have an issue.  

I think a rate increase would make it more likely for banks to become lenders again and I think that’s good for business overall.  

Steven Halpern:  Now market bears point to insider selling as a decided negative. Yet you suggest that there’s more to this story.  Could you explain that?

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Vahan Janjigian:  Yeah, insider selling is, in my view, not nearly as informative as insider buying and that’s because there are so many reasons why insiders might sell stock.  You know, an insider might sell stock because they need money.  

A lot of these people are compensated very heavily with equity and if you’re sending your kids to college—or something like that—or you want to buy a house, chances are you might sell some stock in order to raise the capital to do that. You might also sell some stock because you want to diversify your portfolio.

These are people who have all their labor invested in one company and a large part of their wealth invested in that company, so it makes sense for them to sell stock from time to time. Insider buying, on the other hand, if these people are willing to use their own money to buy stock, well that’s a very strong signal because the only reason they would do that is if they believe the stock was undervalued. I pay much more attention to insider buying than I do to insider selling.  

Steven Halpern:  We’ve touched on a number of areas where you’re more optimistic than the consensus. On the other hand, you do suggest that there are some concerns about the outperformance of just a handful of large-cap stocks. Could you explain why this might be a cause for concern?  

Vahan Janjigian:  Yeah, I think we’ve gone through a period where investors have pretty much disregarded profits and focused more on revenue growth.

As you know, we’ve had a long period of time where revenues have not been growing very much at all, but profits have been growing because of cost cutting, so I think a lot of investors have taken the strategy of focusing on perhaps technology companies that have tremendous revenue growth even though they don’t have any profits.

So when you see stocks of companies like Tesla (TSLA), for example, going up tremendously, that for me is a cause for concern and I think there are a lot of stocks out there that are tremendously overpriced, because investors have gotten so excited about their revenue growth and had decided that for these kinds of companies we’ll just assume the profits will come someday in the distant future. I think that’s a very dangerous thing.  

Furthermore, in my opinion, I think the stock market to a large part has gotten ahead of the economy, even though I still think that the economy is going to do better, I think stocks may not keep up with the economy for quite some time.

Steven Halpern:  You’ve recently suggested with oil falling below $40 that now might be a good time to begin establishing long-term positions and one way you recommend gaining this type of exposure is through the Energy Select SPDR ETF (XLE). Could you share your thoughts on the outlook for energy and why you would suggest investors look at this ETF?  

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Vahan Janjigian:  Sure. You know, in my view, oil prices have come down way too low.  When oil was at $100 a barrel, I was avoiding anything that was energy related because I felt that the price of oil was much too high and I felt that the sale price of oil was somewhere between $60 to $80 a barrel, which is still my view.

When oil started falling I decided to start adding to some of these energy positions. In hindsight I got in too soon and I’m actually shocked to see oil as low as it is now.  

Basically, what’s going on is we have a problem with oversupply in the world. Much to many people’s surprise, demand is still growing.  A lot of people think that there is weak demand.  Demand is still growing, but supply had been growing faster because we got into a situation where American companies got very good at fracking.

And so they added to that supply and now we see that the OPEC nations are refusing to cut production because they would love to see these American companies go out of business and none of the OPEC countries wants to cut production unless all of them cut production, but OPEC needs a higher price of oil simply to meet their budgetary commitments.  

As a result, I think that relatively soon we’ll reach equilibrium between supply and demand and then we’ll start seeing oil prices not just stabilize, but going up a little bit.  

The XLE is an ETF that invests in energy companies and I think it’s a good way to get exposure to the energy sector if you want to avoid picking individual stocks.  

However, your listeners should be aware that the XLE is very heavily weighted towards just two companies, that’s Exxon Mobil (XOM) and Chevron (CVX). You won’t get as much diversification as you might think, but I think it’s still a good way to get exposure to energy.  

Steven Halpern:  You’ve also suggested buying Vanguard Utilities ETF (VPU), which, in a similar vein, does get broad exposure to the utility sector.  What’s the attraction here from your standpoint?

Vahan Janjigian:  Well, actually, I was comparing Vanguard Utilities to some overpriced stocks and said that I would rather be in something like the Vanguard Utilities Index rather than some of these overpriced stocks.

Utilities, of course, are interest rate sensitive, so there’s a school of thought that thinks that if the Fed were to raise interest rates then these companies might get hurt. There is some truth to that.

But in my view, the interest rate hikes by the Fed are so well anticipated by the market that I don’t think there’s much risk getting into utilities now for fear of interest rate hikes.

And, furthermore, even though I believe the Fed will raise rates, I think they’re going to be so careful about it and so slow about it that it won’t necessarily cause an interest rate hike on the longer end of the yield curve. So, given moderate amounts of increases in the Fed funds rate, I think utilities might actually end up being a good place to be.  

Steven Halpern:  Again, our guest is Vahan Janjigian of the Money Masters Stock Report.  Thank you so much for your insights today.

Vahan Janjigian:  My pleasure Steve.

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