Like Warren Buffett’s legions of followers, we enjoy reading his annual letter. He writes as clearly as he thinks. Buffett’s also a great interviewee, and his TV appearances with Becky Quick on CNBC are engaging – although it’s quicker and almost as illuminating to read the transcript.

Buffett is quick to admit mistakes, which simply highlight how few he makes. Overpaying for Kraft was a recent, big one. The company was combined with Heinz in 2015, creating Kraft Heinz Corp (KHC). Berkshire (BRK), in partnership with Brazilian investment firm 3G, had taken Heinz private two years earlier. Buffett still thinks it’s a great business, but what caught our attention was his comment on brand erosion. In Buffett’s own words, from his CNBC interview:

“Heinz was started in 1869. So it had all that time to develop various products, particularly ketchup, things like that.

“They’ve been distributed worldwide through tens and hundreds of thousands of outlets. They’ve had hundreds of millions…they spend a fortune on advertising. And their sales now are $26 billion. Costco introduced the Kirkland brand in 1992, 27 years ago, and that brand did $39 billion last year whereas all the Kraft and Heinz brands did 27– $26 or $27 billion. So here they are, a hundred years plus, tons of advertising, built into people’s habits and everything else, and now Kirkland, a private label brand, comes along and with only 750 or so outlets does 50% more business than all the Kraft Heinz brands. So house brands, private label, is getting stronger.”

Part of Buffett’s success has been improving upon the Graham and Dodd principles that defined his formative investing years. He recognized that demanding a discount to intrinsic value overlooks the intangible value of brand. His 1988 purchase of shares in Coke (KO) was an early example of this. KO currently trades at 11X book value. Their consistently high return on equity supports this high multiple. The brand is KO’s “moat”, generating far more profit than an unbranded carbonated, sugary beverage would.

Kraft Heinz has iconic brands too, but they’ve turned out to be more vulnerable to low cost competition than many expected. Buffett’s overpayment for the Kraft Heinz combination was in some ways caused by the enduring success of the Coca Cola brand.

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Buffett again:

“Now, the interesting thing about Kraft Heinz is that it’s still a wonderful business in that it uses about $7 billion of tangible assets and earns $6 billion pretax on that. So on the assets required to run the business, $7 billion– they earn $6 billion– roughly after depreciation pretax. But we and certain predecessors, but primarily we, we paid $100 billion more than the tangible assets. So for us, it has to earn on $107 billion, not just on the $7 billion that the business employs.”

KO has unrivaled distribution — think of all the places you see bottles of Coke on sale. And tastes are shifting away from some KHC products, such as Oscar Meyer hot dogs which countless households ban because they regard as containing carcinogens. But the broad success of Costco’s Kirkland shows that brands can be more vulnerable than previously thought.

3G’s reputation for aggressive cost cutting led some to suggest they’d damaged the KHC brands. But Buffett noted that cuts were mostly overhead, “… they cut costs not in innovation, or in product quality, or anything like that. They just took it out of SG&A basically.”

The erosion of KHC’s brand value reflects the growing power of WalMart, Costco and Amazon. It didn’t just happen during the 4Q18 period for which KHC took its write-down, but the issue just gained more attention. It’s probably altered Buffett’s thinking too. Moats need to be harder to breach.

Energy infrastructure is one sector that’s invulnerable to brand erosion from new competitors, which ought to make it appealing to Buffett. An installed pipeline is unlikely to be threatened by a new one. Tomorrow’s winners in this sector will come from today’s big firms.

Climate change is the big uncertainty hanging over oil and gas pipelines. Buffett believes electric vehicles are, “…very much in America’s future.” While the energy sector grapples with the consequences of these shifts, U.S. energy infrastructure enjoys three benefits:

• increased electricity generation will drive demand for natural gas
• uncertain long term demand for crude oil is reducing the capital invested in big, conventional projects in favor of short-cycle, precisely what U.S. shale offers
• U.S shale produces a lot of natural gas liquids, approaching 5 million barrels a day, used as feedstock for the petrochemical industry

U.S. energy infrastructure has an enviable moat. Rising dividends, for the first time since 2014, are drawing new investors.

We are invested in KHC.

SL Advisors is the sub-advisor to the Catalyst MLP & Infrastructure Fund.  To learn more about the Fund, please click here.

SL Advisors is also the advisor to an ETF (USAIETF.com)

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Earnings season often produces memorable soundbites during the conference calls that follow. Last summer, Energy Transfer (ET) CEO Kelcy Warren said, “A monkey could make money in this business right now.” (see Running Pipelines is Easy). Kelcy is not overly burdened with modesty, but at least he is backing up his brash comments with results. ET’s 4Q18 report completed a strong year, and they reaffirmed previous 2019 guidance that is at the high end of expectations. ET is seeing the benefits of its exposure to Permian crude oil, natural gas and NGL logistics.

The company has an aggressive culture, which is reflected in their laudable response to troublesome environmental activists. But it also shows up in conflict with regulators in Pennsylvania, where all work was recently halted on its Revolution pipeline project due to compliance failures. When asked what lessons they’ve learned, Kelcy answered “We’ve learned a lot. Every place is not Texas.” There’s also the ill-fated pursuit of Williams Companies (WMB), which included a dubious issuance of convertible stock to management (see Will Energy Transfer Act with Integrity?, written when we thought they might). ET’s management has a checkered reputation.

Nonetheless, with a Distributable Cash Flow (DCF) yield of 14.7%, this is a cheap stock. If not for the preceding considerations it would be a bigger position for us.

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Joe Bob Perkins, CEO of Targa Resources (TRGP), provided this quarter’s memorable quote. Responding to a question about increased 2019 growth capex, he responded, “…I described it as capital blessings”.

One reason why S&P Energy has been the weakest sector for four of the past five years is the differing views on capital allocation between management and investors. Companies want to invest to grow, while investors would prefer greater return of cash, through buybacks and dividend hikes. Joe Bob knows what investors want whether they like it or not. He continued, “Those are high return strategic investments that every investor looking under the covers would want us to make. And I think most investors and analysts like you looking from the outside in, knowing what they are and when they’re coming on, wanted us to make those investments.”

Joe Bob Perkins gives the impression of tolerating his investors rather than treating them as owners. You’d think having missed selling the company at $140 per share five years ago to ET, he’d have a little more humility.

You could almost hear the TRGP Investor Relations folk wincing. The 13% subsequent drop in TRGP more than offset the bounce earlier in the week from the attractive sale of 45% of their Badlands project to Blackstone Group.

Plains All American (PAGP) saw a welcome rebound in its Supply & Logistics (S&L) segment. MLPs are often described as possessing a “toll-taking” business model that implies stability. S&L is all about exploiting basis differentials – when the price of crude oil between two different points differs by more than the tariff of the available pipeline, PAGP’s network allows it to extract additional profits that are a form of arbitrage. It is a measure of tightness in pipeline availability. In 2013 S&L generated $822MM in EBITDA.

Like other midstream companies, Plains expanded its asset base as the Shale Revolution pushed volumes higher. S&L is a volatile business, and its collapse in 2017 to $60MM in EBITDA coincided with PAGP’s increasing debt, raising leverage and leading to distribution cuts. In general, reduced payouts across the industry coincided with rising EBITDA. But in PAGP’s case they erred by relying too much on a part of their business that relies on market inefficiencies, and doesn’t provide the recurring revenues of pipelines and storage facilities.

Income-seeking investors endured two distribution cuts. The first cut came when the company simplified its structure by waiving the incentive distribution rights PAGP held in its MLP, Plains All American (PAA). A year later, and after an expensive Permian acquisition, it was cut again. Today, both securities offer identical exposure. PAGP provides a 1099 for investors who want simplicity, and PAA a K-1 for greater tax deferral with a little more complexity. By design the two stocks track each other closely.

PAA’s Leverage is now down sharply. 2019 growth capex is expected to be $1.1BN, down from $1.9BN in 2018. The Distributable Cash Flow (DCF) yield is 10.6%, and is expected to grow 6-7% this year.

The prior week WMB reported full year DCF of $2.872BN, up 11% on 2017, as natural gas volumes surged. On the earnings call they noted Transco reached a one day record of 15.68 million dekatherms on January 21 (around 15% of nationwide consumption), when temperatures plummeted across much of the U.S.

Overall, energy infrastructure earnings were mostly good news. We continue to expect increasing dividends this year to draw additional investors to the sector.

We are invested in ET, PAGP, TRGP, WMB.

SL Advisors is the sub-advisor to the Catalyst MLP & Infrastructure Fund.  To learn more about the Fund, please click here.

SL Advisors is also the advisor to an ETF (USAIETF.com)

For almost my entire 38 year career in Finance, we’ve worried about the U.S. Federal deficit. Someone recently asked me if we should still be worried. You’d think that it should have been a problem by now, but it’s not. Thirty year treasury bonds yielding 3% don’t look enticing, but evidently a lot of investors feel differently. Low as they are, U.S. yields are substantially higher than Germany, whose 30 year bonds yield a paltry 0.73%.

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U.S. publicly-held Federal debt to GDP rose sharply following the 2008 financial crisis. Circumstances justified a temporary spike to provide fiscal stimulus, but instead it’s continued to grow. Nonetheless, rates just can’t rise — even though the Fed has stopped buying bonds, others have stepped in. Short term rates might even have peaked, following Fed chairman Jay Powell’s communication missteps in December.

The deficit doesn’t seem to matter. As President Reagan joked, “I am not worried about the deficit. It is big enough to take care of itself.”

This view is easily criticized as needlessly reckless with our country’s future. Markets are forward-looking, and most observers are pessimistic about our long-term fiscal outlook. But yields don’t reflect that. Since our current indebtedness is clearly manageable, it’s worth considering alternative outcomes.

Excessive debt was part of the reason for the 2008 crash. As the economy recovered, the U.S. pursued a stealth devaluation by maintaining negative real interest rates. It’s a well-worn path, and while Ben Bernanke didn’t articulate it as such, treasury yields were so low that buyers suffered a loss of purchasing power after taxes and inflation. Even today there’s hardly any return, although a large proportion of the holders aren’t taxable.

Populism adds an interesting dimension. Let’s suppose that U.S. bond yields rise to more fully reflect the sorry state of fiscal policy. Increased interest expense crowds out other expenditure. The Congressional Budget Office forecasts that net interest expense will double by 2024 and almost triple by 2029. They assume ten year yields rise to around 3.7%. The U.S. Debt Clock has some interesting figures.

If the buyers of our debt demand higher rates as compensation for the outlook, interest expense will rise even more. This will crowd out other priorities and add further to the deficit. Stocks would weaken; growth would slow. We can all imagine how a populist-leaning president, like Trump, would respond. Rather than focus on cutting domestic spending, foreign buyers would be warned to keep investing. The U.S. might threaten a withholding tax on foreign holdings of our debt, effectively lowering the rate. It would constitute a default. Who seriously thinks Trump would blink at the prospect?

It needn’t be a Republican. Early Democrat presidential contenders are similarly populist. How would a president in the mold of AOC (gulp) react to foreign creditors slowing the Green New Deal’s hugely expensive re-engineering of America’s economy?

The moral requirement to repay debt has been steadily weakening for years. Federal debt represents an obligation passed down from one generation to the next. It’s easy to see the political appeal in questioning why the country should repay money that was spent on entitlements by a cohort long gone. The bond buyers should have known better. In 2013, in Bonds Are Not Forever; The Crisis Facing Fixed Income Investors, I expanded on this line of thinking. It’s no less relevant today.

Such problems are in the future, but should be well within the time frame of a thirty year bond investor. Today’s yield curve suggests they’re not worried at the prospect. They should be. Publicly held U.S. Federal debt is $16TN. Another $6TN is owed to other agencies, half of which is Social Security. When you owe $16TN it’s their problem too.

Join us on Friday, February 22nd at 2pm EST for a webinar. We’ll be discussing the outlook for U.S. energy infrastructure. The sector has frustrated investors for the past two years, but there are reasons to believe improved returns are ahead. We’ll explain why. To register please click here.

Long time MLP investors fondly recall the days before the Shale Revolution, when yield comparisons with REITs and Utilities made sense. This ended in 2014, when the energy sector peaked. Cumulative distribution cuts of 34%, as subsequently experienced by investors in the Alerian MLP ETF (AMLP), convinced income seeking investors that pipelines were a hostile environment.

During the 2014-16 collapse in crude oil, yield spreads on energy infrastructure blew out compared with sectors that were formerly peers. It might be the only period in history when companies have slashed distributions primarily to fund growth opportunities, and not because of an operating slump (see It’s the Distributions, Stupid!)

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Several months ago, Bank of America published this chart showing that EBITDA for the sector grew steadily through the energy collapse, and leverage came down. Persistent weakness in the sector can best be explained by the betrayal of income-seeking investors. Distribution cuts were unacceptable to many, regardless of the reasons.

2019 should be the first year since crude oil bottomed at $26 per barrel that payouts will be rising (see Pipeline Dividends Are Heading Up). Because falling distributions are so clearly the reason the sector has remained out of favor, increasing payouts could provide the catalyst that will drive a strong recovery.

Income-seeking investors who return to the pipeline sector will find much to like. Funds From Operations (FFO) is a commonly used metric for REITs. It measures the net cash return from existing assets. The analogous figure for energy infrastructure businesses is Distributable Cash Flow (DCF).

We’ve found that comparing pipelines with real estate resonates with many readers. Differentiating between cash earned from existing assets and cash left over after investing in new assets is intuitive when applied to an owner of buildings.

As we showed in Valuing Pipelines like Real Estate, looking at Free Cash Flow (FCF), or net cash generated after new initiatives, doesn’t present an accurate picture if a company is investing heavily. And because dividends have been declining, it’s been hard for investors to get comfortable that current payouts are secure. Since neither FCF nor dividend yields have been enticing, capital has often avoided the sector.

MLPs commonly paid out 90% or more of their DCF in distributions, which left too little cash to fund the growth projects brought on by the Shale Revolution. Attractive DCF yields drew scant attention when payouts were declining, but a consequence of the sector’s loss of favor is that 2019 DCF yields are two thirds higher than for REITs.

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Moreover, they’re set to grow faster. U.S. REIT investors can expect only 2% growth in FFO on a market-cap weighted basis (data from FactSet). We expect 2020 DCF for the American Energy Independence Index to jump by 10.3%. Improving cash flow supports rising dividends, which we expect will be up 10% this year and next (see Income Investors Should Return to Pipelines in 2019).

Much of this is the result of growth projects being placed into production. A pipeline doesn’t generate any cash until it’s completed, so virtually all the expenditure occurs up front. MLP investors suffered the distribution cuts necessary to help fund this – we’re now starting to see the uplift to cashflows. It’s further helped by a likely peak in growth expenditures (see Buybacks: Why Pipeline Companies Should Invest in Themselves, chart #4).

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Once REIT investors return to comparing their holdings with energy infrastructure, they’re going to find strong arguments in favor of switching. They’ll find they can upgrade both their income and growth prospects by moving their REIT holdings into pipelines. MLP yields are historically wide compared with REITs, and 85% of the last decade the relationship has been tighter. Just remember to invest in broad energy infrastructure and not to limit your investment to MLPs (see The Uncertain Future of MLP-Dedicated Funds). Four of the five biggest pipeline companies are corporations, not MLPs, which nowadays represent less than half the sector.

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The Shale Revolution is a fantastic American success story. The Energy Information Administration expects U.S. crude oil output to reach 13 million barrels per day (MMB/D) next year. The U.S. continues to gain market share. It’s estimated that Saudi Arabia needs a price of at least $80 per barrel to finance their government spending. To this end, the Saudis are cutting production to below 10 MMB/D. They’re slowly ceding market share in the interests of higher revenues.

Investors have little to show for allocating capital towards the Shale Revolution. That is about to change. The American Energy Independence Index is up 18% so far this year, easily beating the S&P500 which is up 10%. The sector is starting to feel the love.

Join us on Friday, February 22nd at 2pm EST for a webinar. We’ll be discussing the outlook for U.S. energy infrastructure. The sector has frustrated investors for the past two years, but there are reasons to believe improved returns are ahead. We’ll explain why. To register please click here.

We are short AMLP.

SL Advisors is the sub-advisor to the Catalyst MLP & Infrastructure Fund.  To learn more about the Fund, please click here.

SL Advisors is also the advisor to an ETF (USAIETF.com)

At the InsideETFs conference in Hollywood, FL, author Michael Lewis outdrew the many luminaries on hand offering investment advice. From Liar’s Poker to The Fifth Risk, Lewis has honed his ability to identify a story and recount it engagingly. Interviewer Barry Ritholtz provided thoughtful questions that allowed his guest to enlighten and entertain.

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The book you write isn’t what people read. Liar’s Poker was intended to turn young graduates away from Wall Street. After all, Lewis abandoned a sharply rising $250K annual income for a $40K book contract, only to receive over 100 letters seeking career advice in banking.

Two of Lewis’s books have been made into movies. Tom Wolfe offered memorable advice — when Hollywood, CA offers a movie deal, drive fast to LA; hurl the script over the wall; grab the cash they toss back, and drive very fast east. Bonfire of the Vanities, Wolfe’s novel which caught the 1980s Wall Street zeitgeist only preceded Lewis by a few years. It might be the worst movie ever made, deeply disappointing to Wolfe’s readers and no doubt the author himself. Lewis invests his personal assets in index ETFs which drew a hearty round of applause.

On the more prosaic topic of ETFs, business continues to grow strongly. NYSE executive Doug Yones reported that ETFs have reached 40% of exchange volume. Christmas Eve, normally one of the quietest days, was a record as stocks plunged before January’s rebound. Yones is relieved that this happened without NYSE making headlines. Many have predicted volatility would expose flaws in the structure of ETFs. Criticism is diminishing, as the market keeps working. Pressing the advantage of momentum, Yones expects ETF volumes to double.

Fixed income is a big source of growth. The yield curve offers around 2.5% at every maturity. One dimensional but finally a return of sorts, there are many opportunities to restructure indices that afford quite precise portfolio construction.

ETFs are now offered that mimic structured notes, with capped upside and limited downside. Doug Yones expects actively managed ETFs that don’t provide daily position transparency to be available soon, bringing in some new proprietary strategies.

Bitcoin, last year’s fad, has been replaced by marijuana ETFs. No matter that farming relies on extensive government support, weed believers note huge paper profits for early investors. No more articulate response is required.

As in the past, we derived most value from scheduled and impromptu meetings. S&P is our partner for our ETF,  so Michael Mell kindly endured a photo with your investment management team.

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The ETF business has never looked so strong.

To slow global warming, we should phase out cows. Bovine flatulence is often a source of scatological humor for those making light of greenhouse gas emissions (GHG). However, cattle generate 5 gigatons of CO2 equivalent, annually. More precisely, they produce methane. A chart used by Bill Gates reveals that cattle produce almost as much in harmful emissions as the U.S., and half of China.

The global cattle herd wouldn’t have to be summarily executed – simply allowed to die out with no new replacement cows. On average, cows live about twenty years. If the world could eliminate an America’s-worth of 2018 GHG emissions by 2039, why isn’t that a reasonable option? The U.S. has 6% of the world’s cattle. As with many issues of global warming, the problems are elsewhere. Based on headcount, 35% of bovine emissions come from Brazil, India and China.

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The proposed Congressional resolution that incorporates the Green New Deal (GND) doesn’t include the end of cows. Curiously though, a Q&A was posted on the website of Representative Alexandra Ocasio-Cortez (a co-sponsor) that implied the eventual elimination of “farting cows and airplanes,” although this was soon taken down (still available here). This is what making policy on the hoof looks like. The sponsors also considered a twelve year deadline for the elimination of fossil fuels in America, but omitted it from the final language. This is more disruptive and expensive than dealing with cows, and happily even less likely. The Green New Deal is hopelessly unrealistic. Even Nancy Pelosi referred to it as the “Green Dream”.

The GND doesn’t address agriculture, other than advocating “family farming,” to promote healthy soil and food. This sector generates a quarter of global emissions.  Industry and manufacturing account for 20% of GHGs.  While the GND calls for “removing pollution and GHG emissions from manufacturing and industry as much as technologically feasible,” there isn’t a zero emission way to produce plastic, steel, cement, chemicals, medicines, electronics and all the carbon based products that make up modern life. Buildings directly contribute another 6%, and the GND requires “upgrading all existing buildings in the United States and building new buildings to achieve maximal energy efficiency, water efficiency, safety, affordability, comfort, and durability, including through electrification.”

The document’s solutions are neither realistic nor practical.  The country can’t start producing more of everything, with no negative externalities, at lower cost.  Electric engines won’t power airplanes or cargo ships anytime soon. Given current technologies, electricity generation and light duty vehicles (around one third of GHGs) are currently the only plausible targets. Only a small portion can be converted economically.

Like much else in politics, extreme views are adopted to motivate core supporters. Socialist ideas in the GND, such as free college, “high-quality union jobs” as well as Federally guaranteed jobs are not related to the environment. Including a grab-bag of left wing ideology adds a juvenile feel.

Last year’s report from the UN’s Intergovermental Panel on Climate Change (IPCC), warned of the planetary risks from increased GHG output, which is caused by humans. Its most famous soundbite is its call to limit future global warming to 1.5 degrees C above pre-industrial levels.

The science around the climate is complicated. Scientists have been predicting catastrophe from rising GHGs for years. You can find serious forecasts from the 1980s showing New York City submerged by now. The IPCC seeks to aggregate the best scientific analysis. It shouldn’t be dismissed out of hand, even though like past efforts, it could be overstating the problem.

So far, planetary warming is noticeable to some but not that disruptive. Nonetheless, most people would agree to some reduction in GHG emissions, if the cost/benefit trade-off was acceptable. The GND doesn’t speak to them. It seems you have to be aligned with the extremists, or you’re opposed.

Cheap, accessible energy is a key driver of rising living standards. The planet may be warming somewhat, but so far the benefits to humankind have been enormous. Put aside for now our energy-dependent lifestyles in developed countries – in emerging economies, there’s a direct link between increasing energy consumption and longevity. Alex Epstein’s The Moral Case for Fossil Fuels defines the issue around what’s good for humanity. Indonesia is just one example of a country where energy has led to cleaner water and better hygiene, leading to longer, healthier lives (see Guess Who’s Most Effective at Combating Global Warming).

Science is driving the concern about global warming. A serious effort to limit GHG emissions also accepts the science-based limitations around relying exclusively on renewables. Most obvious is the inability of batteries to efficiently store the energy produced by intermittent solar and wind for later use. Estimates of the GND’s required investment run into the trillions of dollars, and rely on advances in technology not currently in sight.

“From a vantage point like mine, they’re certainly outside the realm of what is achievable, and I’m not sure that by putting those proposals forth, we’re actually really moving the ball forward for the agenda,” said Francis O’Sullivan, head of research at the MIT Energy Initiative.

Away from the extreme fringes of debate, nuclear power is recognized as part of the solution (including by IPCC). Natural gas is a cleaner alternative to coal, and in being available when solar and wind are not, it improves the utilization of renewable supply.  Environmental activists oppose these and other plausible strategies to advance their goals.

Pipeline opponents cause Canada to move its crude oil by rail (see Canada’s Failing Energy Strategy), and Boston to import liquefied natural gas from Russia instead of Pennsylvania (see An Expensive, Greenish Energy Strategy). Today, fossil fuels provide around 80% of the world’s energy. Inflexible opposition to what works without practical alternatives risks enormous disruption, more expensive energy and lower living standards. In America, the pursuit of extreme solutions risks provoking opposition to even reasonable ones. For poorer countries, it means giving up aspirations for healthier lives.

We invest in energy infrastructure, and we care about the environment. It’s our planet too. The issues are too important to be left to extremists.

SL Advisors is the sub-advisor to the Catalyst MLP & Infrastructure Fund.  To learn more about the Fund,  please click here.

SL Advisors is also the advisor to an ETF (USAIETF.com).

Last week President Trump tweeted, “Dow just broke 25,000. Tremendous news!” It wasn’t the first time the Dow had risen through that threshold. On July 14^th, the President tweeted, “The Stock Market hit 25,000 yesterday.” A year ago, on January 4^th, 2018: “Dow just crashes through 25,000. Congrats! Big cuts in unnecessary regulations continuing.”

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This president probably cares more about short term moves in stocks than any predecessor. He has adopted it as a report card of how his administration is doing. Past presidents have generally positioned themselves above the fray, concerning themselves more with economic data such as GDP growth and unemployment. These are important to President Trump too, but the Dow provides a real-time gauge of his performance, reflective of today’s social media supported news.

His cabinet colleagues clearly recognize this. We winced at Treasury Secretary Steve Mnuchin’s comments in December that banks had “ample liquidity”. Stocks were very weak, largely because of problems caused by the government. The trifecta of growth –inhibiting tariffs, a looming federal government shutdown and Fed chair Powell’s communication missteps were the main cause (see Problems Made in DC Can Be Fixed There). But nobody had questioned banks’ liquidity until Mnuchin’s amateurish intervention.

Compared with the Goldman colleagues who preceded him, this betrayed the absence of a deft touch, and briefly raised more concerns than it settled. But it reflected the attention this administration pays to any substantive moves in equities.

President Clinton’s former campaign manager, James Carville, once commented that in his next life, “…I would like to come back as the bond market. You can intimidate everybody.” He also coined “The economy, stupid.” This phrase came to symbolize Clinton’s campaign singular focus and its improbable victory over George H. W. Bush.

GDP reports are too slow in providing feedback, so movements in the Dow offer more immediate information. Given the Tweets that follow when it reaches milestones (even if those milestones have been reached before), you can assume Trump badly wants to brag about the market going into next year’s election. Policies that are good for the economy must be good for stocks; therefore, when the Dow signals dismay, it’s likely to draw a reaction.

That doesn’t guarantee economic policies that will support stocks – the trade frictions with China are an example. But it does mean that there’s limited overall tolerance for pursuing policies that damage the market. The federal government shutdown lasted longer than expected.  It quickly ended, without the wall that was its purpose, once a major airport had to shut because of missing air traffic controllers. This likely won’t be repeated, and emergency action to build the wall will be tied up in the courts where it’ll be symbolic and harmless.

Trade friction is taking its toll. U.S. objectives are broad but not specific. We are approaching March 2^nd, when the U.S. is set to impose additional import taxes on $200 billion of Chinese exports. As the deadline nears, expect Trump to find a way to claim victory and avoid the inevitable market swoon that would otherwise follow.

For years, the ‘Greenspan Put’ provided investors some comfort that the Fed would rescue them from economic weakness. Much of what moves stocks today emanates in Washington DC. As attention turns to the next presidential election, equity investors are likely to see the ‘Trump Put’ become the ultimate arbiter of what is administration policy.

SL Advisors is the sub-advisor to the Catalyst MLP & Infrastructure Fund.  To learn more about the Fund,  please click here.

SL Advisors is also the advisor to an ETF (USAIETF.com).

The U.S. Energy Information Administration (EIA) recently published their 2019 Annual Energy Outlook. Whenever your optimism on the prospects for U.S. energy infrastructure waivers, this will restore your confidence. The outlook for domestic energy production is bullish, and in many cases more so than a year ago.

For example, in their 2018 report, the EIA’s Reference Case projected that the U.S. would eventually become a net energy exporter. Now, thanks to stronger crude and liquids production, they expect that milestone to be reached next year.

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The expected improvement in America’s balance of trade in liquids is dramatic, especially compared with last year’s report. It’s equivalent to an additional 2.5-3.0 Million Barrels per Day (MMB/D) of output.

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Liquified Natural Gas (LNG) exports are also set to jump sharply, and overall natural gas exports are projected to more than double over the next decade. This is driven by growing Permian crude output, which comes with natural gas as an associated product from oil wells. It’s why flaring is common today, because the needed takeaway infrastructure for natural gas remains insufficient. Mexico’s own infrastructure to import natural gas for electricity generation is still being developed, and new LNG export facilities will provide further demand.

The middle chart in the panel below highlights the correlation of natural gas output with the price of crude oil. This is because the EIA assumes that higher crude prices will stimulate more Permian oil production, producing more associated natural gas.

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Although use of renewables to generate electricity will grow, they’re still expected to provide less than one third of all electricity even in 30 years. Almost all the growth will be in solar, which works best in southern states that receive more sun. Although my state, New Jersey, is subsidizing residential solar roof panels, they’re not much use in winter. This is especially so because electricity demand generally peaks twice a day, around breakfast and dinner, when people are leaving for work/school or returning home. At this time of year in the northeast, it’s dark during both peak periods. Only half the days are even partly sunny, with cloud cover rendering solar ineffective on the rest.

Moreover, the bucolic, leafy suburbs enjoy plenty of summer shade which can also block the sun from reaching solar panels. Widespread deployment of solar will require cutting down some big old trees that impede southern exposure.

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Large-scale battery technology doesn’t exist to store midday solar power for use at peak times Therefore, intermittent sources of power (also including wind) require substantial excess capacity, as well as baseload power that’s always available. Environmental activists haven’t all accepted this yet, but natural gas remains the big enabler for increased solar power.

Some extremists desire a carbon-free world, but that Utopian objective ignores the symbiotic relationship natural gas and solar/wind share. They’re complimentary energy sources. Opposing all fossil fuels impedes the growth of intermittent energy sources and forces more excess, redundant capacity. The Sierra Club and those who share their views seek impractical, purist solutions that will struggle both economically and politically.

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Natural gas is in many ways a bigger U.S. success story than crude oil. Its abundance ensures continues low prices, supporting both exports as well as cheaper domestic electricity than most OECD nations. Because the U.S. has some of the lowest-priced natural gas, different scenarios nonetheless offer fairly uniform growth in output. Natural gas prices are less susceptible to the cycles of crude oil, which combined with America’s advantages noted above makes investing in its infrastructure more attractive.

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There’s plenty in the EIA’s 2019 Outlook to support a bullish view for midstream energy infrastructure. Financing growth projects has weighed on stock prices for several years, leaving investors frustrated and complaining about insufficient cash returns. But if the peak in growth capex peak is behind us, as looks likely, free cash flow and payouts should start increasing again. Cash flow yields on the sector average 12% before growth capex. This is analogous to the funds from operations metric used in real estate, but double the yield on the Vanguard Real Estate ETF (VNQ), for example. REIT investors should take note.

SL Advisors is the sub-advisor to the Catalyst MLP & Infrastructure Fund.  To learn more about the Fund,  please click here.

SL Advisors is also the advisor to an ETF (USAIETF.com).

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The Federal government has been moving markets of late.

Venezuela is the latest issue to watch. The U.S. is currently aligned with most of the world in seeking the overthrow of leader Nicolas Maduro. The sanctions look significant, with almost all Venezuela’s hard currency coming from oil exports, half of which go to the U.S. Finding new buyers won’t be easy, because even non-U.S. buyers will be wary of transacting through the U.S. financial system, potentially violating U.S. law.

In addition, Venezuela’s exceptionally heavy, viscous crude requires blending with condensate before it can be shipped. That condensate is imported from the U.S., so Venezuela will also need to find alternative supplies. So far, global oil markets have reacted calmly to the possible loss of Venezuelan crude, partly because years of inept management have reduced production to around 1 million barrels a day (MMB/D). Six years ago it was as high as 2.5 MMB/D. However events play out, it’s unlikely to be bad for the U.S. given our rapidly growing oil production.

Last year’s corporate tax cuts propelled the S&P500 to a 22% return in 2017, as markets anticipated the jump in profits. Like the prior year’s gains, the slump in December was also made in DC, resulting in a 4.4% loss for 2018. Tariffs (i.e. import taxes) imposed somewhat capriciously, and the unresolved trade negotiations with China led to a slowdown in Chinese GDP growth as well as downward revisions to corporate profits. This was followed by White House complaints about high interest rates, met with Fed chair Jay Powell’s confusing comments suggesting rates may move much higher. Independence asserted, his comments were soon walked back, although equities responded sharply in the meantime.

Last week the federal government reopened, to widespread relief. Press reports described it as a loss for Trump, which naturally raises the likelihood he’ll reject whatever negotiated compromise Congress presents on February 15^th. Markets rallied on the agreement, and later weakened as tweets made clear the dispute over a border wall isn’t yet resolved.

Predicting how each episode is resolved isn’t easy, which makes a defensive posture attractive. The confusion over interest rate policy has sorted itself out, with the Fed likely on hold for now. However, the disagreement over the wall that shut the government for 35 days may burst open again.

But it turns out that the President isn’t Emperor, and Congress has different powers that are intended to give it equal status. Although Trump will complain, Republicans are unlikely to have much stomach for a second federal government shutdown. This might leave the president turning to emergency powers to erect a physical barrier. That’ll be held up by challenges from Congress, or in the courts, or both. For the equity investor, there’s good reason to assume that this stand-off has lost its ability to move markets.

On trade, the negotiations with China drag on interminably. But unlike the wall, there’s no promised tangible objective. So the White House could at any time decide it wants some positive press and accept whatever China is offering, claiming victory.

This is the risk with not holding equities because of current uncertainties. The problems are all made in Washington, which means they’re easily fixed there. Don’t be surprised to see the budget stand-off and China both recede as concerns. With interest rates on hold and S&P500 2019 earnings growth of 6.5%, the market’s P/E is 15.3. Equities remain a far better bet than bonds.

SL Advisors is the sub-advisor to the Catalyst MLP & Infrastructure Fund.  To learn more about the Fund,  please click here.

SL Advisors is also the advisor to an ETF (USAIETF.com).