Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
These are truly remarkable times for hard assets. We are finally beginning to see signs that “king dollar” is joining the race to the bottom in the global currency devaluation wars. Jerome Powell and the Fed have made it abundantly clear this week that, despite record employment, they have concerns about the global economy and the way confidence has been eroded by the possibility of an escalating trade war. The tone of Powell’s press conference was decidedly dovish. The Fed has clearly capitulated, and a multi-year headwind for the US dollar seems to be an increasing likelihood. For the MAPS strategies, we believe this presents a tremendous generational investment opportunity.
We are cautiously optimistic around the technical breakout and six-year high in the gold price, and are placing portfolios in stocks that we believe are best positioned to participate in higher gold prices. You will begin to note those changes in the weeks and months ahead. We seek the highest quality assets, management teams, balance sheets, and corporate governance. It is a sector that has had decades of underinvestment and virtually zero access to capital. As a result, growth pipelines are essentially empty. Our experience suggests that this usually paves the way for the next multi-year up-cycle.
At the same time, we are broadening and diversifying portfolios that we believe are well positioned to take advantage of a weaker dollar while providing stable income to investors. One area in particular where we see opportunity is in energy infrastructure. These utility-like “toll road” stocks are trading at trough multiples despite a massive run-up in broader utilities with better growth prospects and higher returns on capital. The collapse in oil prices in 2016 removed access to capital for the entire energy complex. As a result of this dynamic and regulatory hurdles, we are “short” takeaway capacity for products across many shale basins in North America. Many of these companies have very low to zero commodity price risk, and contracted revenues. They also have dividend (distribution) growth and healthy dividend coverage. In particular, we like companies that have scale all across the value chain – from transportation to storage to exports. You can expect to see this theme expressed in the MAPS portfolios in the coming weeks and months, and we like their nature as portfolio “ballasts.”
Energy is particularly topical given the escalating tensions with Iran and in the Straits of Hormuz – the only passage from the Persian Gulf to the rest of the world. It is a key strategic problem. However, it is our view that the large geopolitical premiums that we have seen in years past will subside. North American shale growth, both in the United States and Canada, have increasingly displaced crudes coming out of the Middle East. We are becoming increasingly cost competitive. Some of the aforementioned transportation bottlenecks remain to be dealt with, but increasingly we can meet our own energy needs in a cost-competitive way. To that end, another one of our key themes is that we expect to see consolidation in exploration and production (E&P) companies. Large companies face flat to declining growth in reserves, and Permian shale is the lowest risk, highest return on capital proposition. We think that the Chevron/Occidental bids for Anadarko are only the beginning as other majors and large independents look to increase scale in the basin. Large companies have maintained higher premiums than their independent E&P counterparts. I believe they will use their relatively more valuable stocks as currency to gain acreage and scale because scale is an ultimate driver of returns. We think a low risk, stable income way to play this theme is through mineral rights.
Another area where we see opportunity is in the timber area. Timber is interesting because, unlike other natural resources areas, it is a biologically renewable and stable real asset. Companies we like pursue best sustainability practices and have high ESG (environmental and social governance) ratings. They are also trading at trough multiples with stable and growing dividends. The sector has maintained capital discipline, and therefore returns on capital have been good. In recent weeks we have seen sawmill capacity come offline, which makes the thesis timely.
We thank you for your continued support and are very excited about the opportunity going forward for the MAPS portfolios.
Chief Executive Officer