How to profit from the “New Strategic Order” in global trade

There’s a major shift taking place right now in global trade. And it could have huge implications for U.S. and international markets alike…

Steve Koomar, publisher and editor of Vigilante Investor, joins me once again for a wide-ranging interview [12:39]. He breaks down everything you need to know about the new global trade alliances forming today—what Steve calls the “New Strategic Order.” 

Steve also shares his thoughts on sectors such as oil and healthcare… and a few of his favorite ideas to invest in right now.

But first, don’t miss my opening monologue, where I explain why everyone should have exposure to the financial sector…  

And in my educational segment, learn how to digest differing opinions when making investing decisions [48:11].

Transcript

Wall Street Unplugged | 678

How to profit from the “New Strategic Order” in global trade

Announcer: Wall Street Unplugged looks beyond the regular headlines heard on mainstream financial media to bring you unscripted interviews and breaking commentary direct from Wall Street right to you on mainstream.

Frank Curzio: What’s going on out there? It’s July 17th. I’m Frank Curzio, the host of the Wall Street Unplugged podcast where I break down the headlines, and … tell you what’s really moving this markets. So, if you’re in Vegas right now at Freedom Fest, you’re waiting for me to present at the conference, you probably just realized something: that I’m actually not at the conference.

So, my apologies. I was really looking forward to Freedom Fest. Scheduled to speak several times. Bull Bear debated and everything, great speech prepared. Also I had lots of meetings set up, but I had to cancel last minute and I always share everything with you guys so, my father in law’s pretty sick, and they found a tumor in his lungs. He’s a smoker. He had to get it removed, we were pretty sure it was going to be cancerous.

He lives in New York, he’s also 75 years old, and yeah. So, the surgery was risky by itself, but just to get a biopsy didn’t sense since it’s like an operation itself, so they just went in there and removed the whole thing, and this happened just a couple days ago, so it was successfully removed, and they did confirm it is cancerous and it’s a bad form of cancer. That’s all we know right now. They’re running more tests and they’re going to give him the final diagnosis next week and we’ll see what happens.

Once we found out, which was not too long ago, probably about four or five days ago, I told my wife, “Listen, just go to New York, just go. Just go, I’ll take everything. Just go and don’t worry about anything else.” So, I was basically watching the kids the past week, keeping the fort down, doing everything for the business, but I had to cancel late which I never do, and I’m really big on commitments, but look, as you guys know, you’ve been listening to me for a long time, family first.

That’s why we’re all doing this. That’s why we all invest, to hopefully increase generational wealth, and I’m very big on family as you guys know. So, Mark Skousen who runs the Freedom Fest conference, who actually called me personally to invite me, I mean he understood 100%, and I told him I’ll definitely make it next year to make it up to him.

I did provide a discount for listeners to go to Freedom Fest, and those who took me up on that offer, which by the way I don’t receive a dime for. Everybody that comes on here, I try to offer really good things. I mean, sometimes we do affiliate deals depending on who it is, but with this, yeah I didn’t receive a dime for anything. They did give us a discount, a special discount, but if you took me up on that offer, just reach out to me, Frank@curzioresearch.com, and I’ll take of you.

I could offer you a six month free subscription to one of my products or whatever because the conference is awesome. It has over 200 speakers. There’s so much to do there, and I know some of you went there specifically to listen to my speech and meet me personally, and I really appreciate that. So, I’m sorry I missed the conference. The good news is there’s 200 speakers there, and you’re in Los Vegas. It could be worse, it could be a lot of other places that are not as fun. But, if you went there specifically for me, reach out to me and let me know because I really had plans to meet some of you.

Some of you just say, “Frank, where are you going to be? I’d like to grab a beer and,” but again, family first, and this came up really last minute. Yeah, so I just wanted to apologize to you guys. Sorry about missing that conference, because I love speaking at conferences. I love making those conferences. I love keeping those commitments, and this is the first time I was speaking at it so it was really tough, but I really had no choice here, and I’d knew you guys would understand.

So, let’s move on here. Favorite time of the year? No, it’s not because it’s full-time baseball season right now. You guys know how I feel about baseball. But it is earning season where we’ve already seen some strong results from banks, and banks always kind of start off the earning season every single quarter. Strong earnings should come as no surprise, even though interest rates are low, which means their net interest margins are pressured.

Usually when interest rates go higher, that’s good for banks. That’s one of the sectors that does well. But, throw in all the regulation, and because of the stress tests right, and this regulation passed shortly after the credit crisis, banks have to keep more capital on their books today compared to any other time in their history. They can’t lend this money out or be aggressive with it, trading, getting into new markets, because everybody believes it’s going to be a credit crisis all over again.

So they only have two choices on what to do with this money, and those two choices are buying back loads of their stock, or increasing their dividend. The big banks are doing both. So Citi Group, big fan for a long time. In our portfolio we’re up nicely on it, pays a nice dividend. Bought back 10% of its stock over the past year. 10%, that’s a huge number guys. You’re looking at Wells Fargo, bought back $20 billion worth of its stock in 2018.

You have Bank of America which said just recently, they’re going to buy back another $30 billion under a new buyback program. That’s another 11% of their shares house standing. So, Citi Group bought back 10%, they’re expected to buy back another 10% over the next 18 months or so. JP Morgan said it’s going to buy back another $30 billion as well worth of its stock in a new repurchase plan. Looking at all of those companies I just mentioned, those big banks, every one of them increased their dividends easily by more than 10% over the last 12 months. Seems like they’re increasing their dividend every quarter.

They have all this money they have nothing to do with, and I got news for you: this trend is not going to change any time soon. So I’m just saying for at least the past two years, you should own a large cap bank stock in your portfolio. I know a lot of people hate the large cap banks, I don’t blame you, and I even hate them for what they did, and the risks that they took, and got bailed out with tax payer money, and the fact that we didn’t even receive any of that many that you made a ton of money on off of our money is pretty crazy, so I get it.

They risked your capital, almost bankrupted the world, only to get bailed out. And what? They’re even bigger today than they were back then. So if that pisses you off which it should, you know what? Go vent on social media. Go hold up a sign in front of JP Morgan’s headquarters, saying how much banks suck, whatever you want to do. But if this is about money or making money, go buy a large cap bank.

Now for some reason when you look at buy backs, this pisses so many people off. I don’t get it. Guys like Dick [inaudible 00:06:37], he’s been probably at 10 different companies at nine years if I had to guess. Pretty good banking analyst. Says that banks buying back so much stock is a horrible thing since banks should not give away capital for stock. Not too sure what else he wants them to do with that money, but there’s a lot of allous at this.

Well, if it wasn’t for buy backs, not just banks in general, BSMP 500 would be much lower. Earnings would be much lower for so many of these companies. When I hear that, it’s just … it’s ridiculous. I mean, it’s funny. The number one driver of stocks is earnings growth. So, by buying back their stock these companies, they’re automatically going to push earnings higher, even in the form of manipulation, legal manipulation, but this is what’s driving the bank sector right now.

As an investor, what do you care about? The only thing you should care about is the stock price. You’re investing in the stock to make money on it. You want to buy low and sell high. So buying back stock increases earnings at a time where their net interest margins are not really that strong, right? We’ve seen lower interest rates. Again, I told you earlier high interest rates are usually good for banks. If we’re raising rates, a higher interest rate, they make more spread on the interest they charge. It’s a lot low when those interest rates go lower.

So, this is offsetting that which is great news. You have them buying back their stock, which increases earnings, right? And then they’re raising their dividends, which are all more than 3% on average. I think Citi Group’s a little bit lower than that, and JP Morgan’s over 3%. Bank of America’s over 3%. So around 3%, more than 3% at around the average, but now by raising the dividend, you’re making yourself incredibly appealing for investors who are seeking income, which is basically the entire planet, right? Trillions of dollars since interest rates are historically low across the world.

Everybody’s looking for you. That’s why you should have exposure to this sector. Not telling you to be over weighed where you have to put all your money in it, no. But, you should have some exposure to large banks who are providing growth through buy backs, right? Automatically, earnings growth. We’re not talking about small buy backs here. They’re buying back 10, 20% of their shares outstanding. That’s the earnings profile.

This is why I recommend Citi Group, because of this. Now they’re seeing business trends pick up. Consumer lending increase. They’re seeing these trends pick up, even if they don’t, we’re safe, because they’re buying back their stock at all times, or most of the time, which they’re providing that for. If this thing comes down, if banks fall 10-15%, you know how much stock these guys are going to buy if that happens? It’s a nice safety net to have, but that’s why you need to be … well, have exposure. Again, not be over weighed to the sector, because growth through buy backs and then income by raising their dividend seems like almost every quarter.

I mean, they’re raising it significantly, and they’re buying back loads of stock. These trends are not going to stop any time soon. Now on deck, we have oil and health care companies, probably over the next week or so, and these are two of the most oppressed sectors performance wise year to date, and this week’s guest is going to tell you why you should be investing in both at least over the next 12 to 18 months.

That guest is Steve Koomar, who’s the editor of Vigilante Investor Newsletter, over 25 years of experience analyzing the markets. He was working at Goldman for a long time, derivatives, in global proprietary trading. He worked for Dehnco where he was a fifth income portfolio manager. So, Steve’s a good friend, brilliant analyst, and writes one of the few financial newsletters in the industry I actually read.

I don’t mean to put people down in the industry, but whenever I try to read another newsletter, I feel like they’re talking about things … 5G is big now. We talk about … two and a half, three years ago we said, “Go to consumers electronic show every year.” When you see trends like AI and everything that people want to talk which are hot right now, it’s things that I feel like I’ve been talking about a long time ago.

That’s the financial newsletter industry, what are you going to do? You want to talk about the trends when they’re at their top, and sell them when they’re at- I think it’s easiest, right? They got to generate money selling newsletters, so let’s talk about the trends that are hot right now. Let’s go all in on marijuana, let’s go all in on crypto currency right now after the move higher. Again, these are things they’ve been talking about for a while.

But with Steve, he’s always writing about great stuff, new trends, and just has an unconventional approach to looking at things, which always challenges my beliefs, and you know what? I love that as an analyst. For example, last week I had a great interview with Meb Faber. Meb highlighted the need for most investors to get exposure to the international markets. Today, Steve’s going to talk about something called the New Strategic Order, which is replacing the New World Order of free trade.

New World Order of free trade was around from World War II, ’40s, until 2016 when Trump got elected. When you read what he has to say, it’s original stuff. Steve has a background in history, going to show you why you should be investing abroad? Different from what Meb said, right? [inaudible 00:11:45] in China’s slow growth problems, in routine for a very, very long time. Regardless of what happens, the trade dispute between US and China.

He’s pro US. He says you should keep your money in the US, and highlights another country in which you should be investing in right now, which is a country, maybe the first time I’ve ever heard anyone say you should be investing in. So, it’s out there. And even better, Steve’s going to provide an easy way for you to invest in this idea, where any investor with an online brokerage account could get exposure. So to me, this stuff’s priceless. You’re going to get two different opinions back to back podcasts, both with Meb and Steve making great points, each of them to support their thesis.

You heard from Meb last week, now let’s here from Steve. This way, you can make your own decision on whether it’s smart to invest in international markets or not, and let’s get to that interview right now. Steve Koomar, thanks so much for joining us again on Wall Street Unplugged.

Steve Koomar: Well thank you, it’s a pleasure to be here. Thank you very much for inviting me.

Frank Curzio: Well, I am a big fan of your newsletter Vigilante Investor. I’m reading the issues, and the last few issues I thought were fantastic, so definitely wanted to have you on to discuss, but before we get to some of those issues, which again, I’m going to really dig in deep to a lot of different industries, I always like to start out with my guests, and talk about the economy, the economic landscape, the markets, what we have.

An interest rate cut is widely, widely, widely expected. They don’t know if it’s going to be 25 basis, 50 basis, most likely 25 basis points. They’re all positive to negatives, but overall, the economy’s not … we’re used to interest rate cuts when things are really, really bad. For me, looking at the economic data, I don’t see it. I wanted to get your perspective of the economy. What does this mean, because a lot of people believe we’re overvalued. We’re on earning season, but I mean, I would think with the fed not just going to cut interest rates now but looks like they’re going to adopt that policy over the next couple of years, it’s pretty hard to go against that, isn’t it?

I mean, what are your thoughts on the economy, the market, and where we’re at right now, where we’re heading maybe over the next 6-12 months.

Steve Koomar: The fed is doing I think exactly what needs to be done to keep the economy moving. Last we talked was in December I believe, and at that point, I was very concerned that the fed had raised rates vary substantially over the course of about a year and a half, and we were at a point where they might be choking off economic growth.

My basic metric was that we had private sector debt of about 150% of GDP, and if they raised interest rates by 2%, that takes about 3% out of growth. Brings you down just kind of a very slow growth territory if that were to happen, but they have noticed either by criticism from the president or maybe from their own measurements that the economy is indeed starting to slow down, and they’re starting the process of cutting rates.

The market things they’re going to cut rates by about 100 basis points in the next year, and I think 25 basis points at the next meeting is an appropriate move, and I think it’s an appropriate expectation for the market place. I agree, I think that continues to fuel economic growth, and continues to fuel the market. It doesn’t mean that it’s a straight line higher. A lot of times when there’s so much anticipation of an interest rate cut that you have right now, it’s so into the bond market, it’s got to be into the stock market too.

So, it wouldn’t be a surprise if you get an interest rate cut and then you might even get a little bit of a selloff in the stock market, kind of by the rumor sell the news type of event. Over the course of the next year or two, you can look forward to a very strong economy helping earnings move higher, helping the economy continue to go higher, and I think that maybe even more important is that where else are you going to put your money?

If short rates are going down to 1.5% or somewhere around there, it kind of leaves the stock market as the only game left in town, and so I think it’s just going to … yeah, it seems like maybe it’s a little bit high, but I bet it gets a lot higher. So, [crosstalk 00:16:14].

Frank Curzio: You know, I interviewed someone last week, his name is Meb Faber, very into international markets and diversification, and what you’re saying, it’s funny, because you’re saying this is the only game in town. Whether it’s right or wrong, and I love differences of opinions, but your last issue was really amazing. You’re talking about something called the New World Order.

When you’re discussing it, and you’re a student of history where you go back and look at economic policy, and you break it down, talk to us about the new world order, because this goes into your thesis of why US is the only game in town, and if you’re looking to invest internationally, you should be very very very careful right now, and I love it because coming from someone who was so bullish in seeing your bearish on the international markets, I love giving people the whole entire story.

Let’s hear from your perspective about the New World Order, because it’s a fantastic write up guys in Vigilante Investors, if you get a chance, definitely go to Steve’s site and read it, it’s definitely worth the issue. But Steve, talk about it means, and what it means for asset allocation.

Steve Koomar: Sure. We established after a post-World War II order, and the US did with British help of kind of … really in line with kind of British economic theory at that time, was to create a free trade regime, and the US agreed to basically sponsor and underwrite free trade at that time. Basically, everybody in the new world got to trade with the US as long as you weren’t part of the Soviet Communist Bloc. We didn’t really care in the US whether you gave us equal trade terms and access to your market. You could tariff us higher than we tariffed you, and it didn’t really matter. We just wanted you to join our club.

It kind of eliminated the need for countries to build empires of extend their colonial possessions, as you had in the prior regime, really doing the colonial era which started around 1500 and ended in 1945, countries that needed access to goods, or needed markets, either built and empire, or they developed a vast colonial empire like the British. This lead to a lot of wars and a lot of problems.

This world order created after World War II eliminated the need for a lot of … for empires and colonies, and it made the world a much more peaceful place, and it was really the principle way in which Europe and Japan rebuilt after being so devastated in World War II. Their economies had access to goods, had access to markets, and they could grow their way out of their problems.

It was a very principle way in which the US kind of built a coalition to defeat the Soviet Union in the Cold War. After the Cold War ended, the US kind of doubled down and maintained the same free trade policies and free navel protection for anybody that was shipping goods across the ocean. Even to the point where in 2001, China was admitted to the World Trade Organization, even though it was a communist country, I think the hope was that they would become more capitalist and freer, and would kind of join the club if they got the same equal treatment.

So, they joined the World Trade Organization, and they had the same benefits as everybody else, but what’s happened wasn’t exactly what the planners in the US had hoped at that time, and China has taken advantage of its economic gains to try to extend its own dominance across Asia and Europe, and become a super power, a hegemon in those regions.

Right now what you’re seeing is with Trump taking hold of the federal government in 2016, he’s basically decided to end, or I should say revise many of those policies. I that there’s free trade, it’s still out there, but it’s being extended in a very strategic way to the people, to the countries that are really strategically important to the US. Free trade is being extended really on a conditional basis.

You saw with Mexico, which is a very important ally of the US, you saw with Mexico just last month, Trump threatened to tariff all the Mexican goods unless they would take certain measures to reduce the flow of immigrants across their country into the US, and it took about a week, and they had an agreement. It’s amazing because this agreement probably could have been had 10 years ago or five years ago. There were certainly many times in the past where it could have been done where it was needed, but when they had the pressure where there was a loss of trade access to this great market the US, then they made the changes that they needed to make to get it done.

And so, it’s being used as a strategic tool, and it’s definitely being used as a strategic tool with China. It’s a pretty problematic situation for Trump to try to maintain some kind of trading relationship with China while he’s really trying to at the same time, reduce their ability to compete with the US as a geopolitical force. China’s got problems, it’s not just that they’re finding that their access to the US consumer is being threatened and therefore their economy growth will slow substantially, but they’re going to find that they have less access to technology so they can’t build the products that they thought they could build.

That’s a big part of it as to where Trump wants to really reduce their ability to compete in development of 5G networks and that sort of thing. He’s also … I think he’s also doing other things, such as with the Persian Gulf. Trump has said that he’s no longer going to protect navel shipments, tankers, flowing through the Persian Gulf because the US doesn’t need oil anymore. Well, that doesn’t hurt Britain or France, or Japan, because they have long range naval vessels that can protect their own shipments, but it’s going to destroy China if they can’t get their oil shipments through the Persian Gulf. They’re very dependent on it.

So all the way around, you see a foreign policy in the US that’s being strategic, and it’s very strategic in including free trade and how it allocates those free trade resources. The economies that you thought were going to grow the overall economy in the past, it was an automatic like China, it’s not there anymore. China’s growth is going to be much slower, and they have other problems too. I mean, they’ve got huge debt. They have terrible demographics. China’s going to be a slow growth country, and it will be lucky if they can keep the stock market where it is for the next 10 years.

There are other countries that are aligned with the US like Mexico, like India, that are going to do very well, but if you’ve got good demographics, you’ve got good trade relations with the US and you don’t have really bad debt, and there are some European economies with really bad debt problems, if you don’t have that really bad debt, than you probably have some good prospects. But, I think that international investors have to be careful and allocate their money where, if they are allocating internationally, where the opportunities are still good going forward.

The US is, I wouldn’t necessarily say the only game in town, but it’s the best game in town. It’s the only big game in town. If you’re looking at emerging markets, you better be very careful. I recommend Mexico. I think that’s a great place to invest, but I like staying pretty close to home at this point in time.

Frank Curzio: A lot of stuff I think a lot of people can resonate with. Guys, this is politics aside here. We’re not talking about politics. I don’t care if you like Donald Trump or not, this is something that’s happening now where we’re trying to get through trade and free trade. We’re trying to make our borders much much better, make the US better, and limit I guess, power from China. But, even if these tariffs, even if they come to an agreement, tariffs, it’s amazing how many companies are making strategic moves now just in case.

You highlight how they’re moving production capacity to Vietnam, they’re moving to Mexico, other countries, even though there’s a shot that all this stuff can okay, which is bad for China in the end, right? Because they’re taking a lot of that growth and manufacturing out of China and moving it elsewhere, this way you don’t have to have problems with it. But, one other thing that you highlight which I want to get to is, when you talk about the foreign markets, you talk about large economies falling behind the US, you look at the bottom market, you talk about negatives yields in Germany and a lot of other places, and how those negative yields also imply low expectations for the European economy and stock markets, right? A lot of what we just talked about.

You say, despite the poor recent returns, some advice is increasing that you have more an allocation towards international stocks and international places. It’s driven in part by a view that the markets will revert back to the mean. I hear this term all the time Steve. I’ve heard it over the last five years when it comes to margins, when it comes to profits, and yet I think people don’t understand the landscape has changed where you and I, and … I mean, we used to back in the day, even my day used to have to go to the library to get 10Ks, now I mean, the productivity has increased dramatically, but yet we’re looking at old models that people say, “Well, it’s got to revert back to the mean.”

Does everything have to revert back to the mean, or is it, “Hey, these are secular changes, and this is one that you’re talking about,” because this is a really big deal when you’re looking at some of the best analysts in the world thinking, “Hey, everything’s going to go back to the way it was,” but yet, the world is a much different place, especially when we have the internet and new technologies, and AI capabilities and cloud. I want to get your thoughts on that because a lot of people do believe we’re going to revert back to mean. I heard that argument for the last three, four years.

It hasn’t happened. Stocks continue to move up, margins continue to expand. What are your thoughts on that?

Steve Koomar: You know, I think that things are changing so fast that reversion to the mean could be one of the most dangerous trading strategies you could have, or investment strategies you could have. With the world order changing so dramatically, and access to the biggest consumer market of all time which is the US, it has been, it still is, and it will be for a long time, access to that market now being allocated and rationed on the basis of really whether the country is strategically complimentary with the US, that changes the whole game.

And so, you can’t just look at these countries and lump all these emerging market countries together, or lump all these international countries together and just say, “Oh, they’re all going to rally similarly with the US when there’s an economic growth across the world.” No, the growth is going to be less even, and the problems are going to be very different in the different places. And so, the economic returns are going to be very different.

So yes, I think that the last thing you want to do is just kind of invest robotically according to previous historical trends and expert reversion to the mean. It’s just not going to happen. My best example of that is Japan. In 1989, I think the Nikkei hit a high of something like 39 000. I can’t remember the exact number, but it’s still barely above 20 000 now, and it’s been languishing between 12 and 22 or 23 for the last 20 years.

It’s just, if you were investing in the Japanese stock market all this time, you’ve basically had a negative return. You may have invested 10 or 15 years ago and made a little bit of money, but it still wouldn’t be that much. That’s what you have to look forward to with China. And so, that’s the one thing, if I can get people to understand that when you’re looking at a big change in regime, or you’re looking at a very severe debt problem, you can’t look at past history and expect it to repeat itself. It’s going to be different.

Maybe there will be some mean reversion over a very very long period of time, but we don’t know what we’re reverting to. We might be reverting to a world order of 100 years ago when the US was by far the biggest and only game in town, and maybe that’s what we’re back to now, and we’re certainly moving in that direction. So yeah, I couldn’t agree with you more that things are different now, and you have to look at the situation in a very specific way to try to figure out what’s going on and where you can make money based on that.

Frank Curzio: Now, just to add to that thesis now, let’s change tunes a little bit here bit here, but saying that we’re the only game in town, one of the biggest things for the US by show of the pats 10 years was shell oil where we discovered tons of oil, almost an unlimited supply depending on what the price is, right? It’s pretty crazy how much we can drill if it goes higher, we can drill deeper and deeper and deeper, especially a place like the Permian, but now we’ve become one of the largest producers in the world in oil, which 15 years ago it was probably unheard of. 20 years ago you would have said you’re absolutely crazy.

Perhaps you’re import facilities for natural gas and things like that, now there are export facilities. So, you’re very bullish on oil. I read your issue, I won’t get into it, I’ll let you explain it, but why are you so bullish on oil, and is it just oil prices or oil companies, because when you look at the balance sheets, these guys have been pushing their debt out further, further, and further. It’s one of the most heavily debted industries. Are you being very selective with those stocks? You see prices going higher. Who’s going to be the beneficiaries? But why are you so bullish on oil, not just now, but it seems like you’re going to be very bullish for a very long time?

Steve Koomar: I think oil prices have some upside to them, and it’s because of what’s going on in the Persian Gulf, specifically with Iran. And then I would add to that that I don’t like every oil company out there. I think that you have to be very careful about where you invest in oil because the price swings are still going to be pretty big, and indebted companies are going to have problems when prices go down. But in the Persian Gulf, you have two issues with the Persian Gulf.

First, the new sanctions on Iran are in the process of taking about two million barrels a day of supply off the market. The previous sanction regime when president Obama was trying to negotiate an agreement with Iran to curtail their nuclear capabilities, that cut about a million barrels a day out of the oils supply, because there were exemptions offered off to China and Japan, and South Korea, and I think India. That was about a million barrels a day that they were allowed to export through that period of time.

There are no exemptions now, and there’s really almost no way to get around the sanctions, because under the Obama administration, the US got control of SWIFT, to a degree where if somebody violates sanctions, there’s a secondary sanction basically that you’ll get cut off from SWIFT. So, there isn’t a bank out there that deals with the international economy. There really isn’t a business, there isn’t a country that wants to get cut off from the international payment mechanism of the world.

These sanctions, as long as Trump wants to hold Iran’s feet to the fire, they’re going to keep all of Iran’s exports off the market, which is about two million barrels a day. If that two million barrels a day hit, and it’s on top of already shrinking supply from Venezuela, and it will probably continue to shrink, and you never know what’s going to happen to Libya. Libya may have problems in the future. They historically do have problems where their oil supplies just get cut off for a few months.

You’ve got some risk to the supply out there, and really some built in cuts to the supply, which will support the price of oil overtime. Saudi Arabia doesn’t really have an interest in pumping out enough oil to suppress the prices of oil until it gets above $80 a barrel. So, you’re in a situation where the only really swing producer out there is the Permian Basin in the US. Those suppliers are going to continue to produce as much as they can at these prices, at $60, or $70, or whatever it is, they’re going to produce as much as they can.

There are some producers out there that are very profitable because the all in cost of oil is in the mid-40s for them, and once the oil rig is drilled, their operating cost is in the 20s. So, they can invest pretty confidently, and as long as they keep their debt levels low, they will be able to stay in business and weather the storms of the price swings. So yeah, I think … I’m modestly bullish on oil. I think that as long as the Persian Gulf supplies are constrained, that’s going to be a good thing.

You never know whether Iran will succeed at cutting off other people shipping like the UAE, or Kuwait that ship through the Persian Gulf. If they’ll be able to cut that off, then you’ll see a real spike to oil prices. But even if that doesn’t happen, I think you have decent upsides to the oil price, and if you just have a $70, 60, 70, $75 oil price for Brent crude I’m talking, then you’re talking about west taxes being $5-10 less than that.

These Permian producers out there like Pioneer or Diamond Back, they have exceptionally high profitability. They’re growing their production, and their debt is very low, and they’re growing their production just out of their cash flows, and they’re paying dividends, and they’re buying back stock. They’re doing all the right things. These companies are going to have substantially growing earnings. They’re real bargains.

Frank Curzio: All right, let’s change gears again, because this is an industry you’ve been writing about, and that is the health care industry, something I cover extensively probably about six to nine months ago, and it was really scary. We kind of can all identify with the numbers. If you own your own business, you know healthcare costs are growing tremendously. If you listen to the news cycle politically, you’re seeing how Medicare for all for free and all this crazy stuff by some of the candidates.

I want to dig in to what you’ve learned about the industry, and how you feel about the industry because my take was very scary where we’re going to see costs raise tremendously but what’s very scary is, there is no end in sight. There’s no solution on the table. There’s not even a little bit of a solution on the table of how this is going to change where prices are going to grow tremendously, and there is specific companies that are going to benefit, right?

So putting your ego aside and everything else, and you’re personal feelings aside, but there’s a lot of companies in the health care industry where if the Affordable Healthcare Act is permanent now, right? So we have … everybody hates each other, nothing’s really going to get done in Washington. But if that’s permanent, you’re looking at maybe 30 million, maybe 40 million people getting health care being paid by people who are working right now, but that means more medical advice, more prescriptions, more everything.

That’s some of the findings that I went through in much more detail, but I was very scared after my research saying, there is no solution in sight. I want to see where you went with this because I haven’t read it. I know you’re coming out with this I believe later on today, Wednesday, but let me know … for me, I’m curious what you found, and what are going to be beneficiaries, and what people need to know the most in healthcare because it’s such a difficult, complicated subject, but when it comes to investing, there’s a lot of money to be made in that industry I believe.

Steve Koomar: Well, I think you’ve seen a lot of the healthcare stocks has gotten trashed this year. It’s the worst performing sector out there. It’s even worse than the oil company sector, and I think a lot of it really comes from 2020 election politics. Bernie Sanders is kind of leading the cheer for Medicare for all, and really all the major candidates except for Joe Biden want Medicare for everybody, kind of a public health care system for everybody, specifically Medicare, and they want to eliminate private insurance.

And so, it’s understandable that would be very disruptive. It’s understandable that investors would be concerned about that, especially when they look at the public opinion polls, and all of the top four democrat candidates in polls, public opinion polls, show that they would beat Trump if the election were today easily. So, it kind of looks like, oh, this is a dangerous situation. But, there’s a few reasons why it’s really not so dangerous.

I can see why investors are concerned and why people would be concerned, because if you just look at it on the surface, there is a lot of cause for concern. But, the first is, Medicare for all is a pipe dream. It can’t happen. Medicare charges about 60% of the real cost. That means that everybody else that uses private health insurance for their healthcare, they’re really subsidizing Medicare. The people that are providing healthcare services, they can’t operate at 60% for everybody though.

If that subsidy disappears from Medicare, Medicare costs or prices have to rise by 40, 50% in order to compensate for that loss of subsidy that Medicare is currently getting. If you did have a Medicare for all, you would have a massively shrinking supply of services if you all of a sudden cut the price by 40% across the board. Where would you find a doctor? They’d start retiring. There would be fewer and fewer people that could afford to provide medical services, if the prices were cut that much.

So, it just can’t happen. This idea of a public health care system, it’s just not ready for America, and certainly not with the context of Medicare and the Medicare system. The other thing about Medicare is it’s very popular and successful, but what makes it popular is private insurance. The Medicare part C Medicare advantage program which was started in the late 90s, and the part D which is the prescription drug coverage, are both private insurance programs that at least the drug coverage is partially subsidized by the government, but they allow senior citizens to fill the gaps in the coverage that Medicare doesn’t provide.

Because the seniors are able to pick and choose what coverage they need and customize for their purposes, they’re getting exactly what they want, and they’re paying what they can to get what they want. And so, it’s made Medicare very very … have a very high favorability rating with the senior citizen community. If you took away those supplemental and private insurance programs, I guarantee you it wouldn’t be popular.

So for many many reasons, this whole idea of eliminating private insurance and going to Medicare for all, it’s just not going to happen. I also think the early polls that you’re seeing that would indicate that Trump is going to lose pretty easily, if you look at the last 10 elections, the early polls have gotten wrong nine out of 10 times. In the end, it’s all about the economy. If the economy is strong, it’s perceived as stronger than it typically is, people rarely make a change in the regime.

So, I think the odds are stacked in favor of Trump’s reelection, which would also limit the risk to this sector. And so I think that there’s some health insurance stocks out there that are priced pretty attractively, and if you’re looking at it from the same viewpoint that I am, that there’s a lot of talk about change but the change is not likely to happen, then there’s some good opportunity there for investors.

Frank Curzio: Yeah, and I jumped on this again, around six months ago I think, maybe a little longer. And yeah, I mean all the rhetoric coming out from all the politicians that that pick that we recommended, a healthcare pick is down a little bit, but I mean at these prices, I mean to me they’re incredibly cheap considering I don’t see a change on the horizon either. We’ll see who gets elected, and even if it’s a democrat, I don’t see too much change. It’s going to be very difficult as we see both sides. It doesn’t matter what side, democrat or republican, comes up with a great idea, the other side’s going to automatically oppose it and trash it. That’s the environment we’re in right now.

Steve Koomar: That’s right.

Frank Curzio: It’s not going to change any time soon, and the fact that it’s not going to change means that there’s tons of money that’s going to flow into health care, and a lot of that is going to be dedicated to insurance companies. In fact, that’s just, hey, a political risk right now. After that, or even going into the election cycle, or going into 2020, these things are dirt cheap right now, so I definitely agree.

Now, we covered a whole bunch of stuff, right? New World Order, we covered oil prices, we covered health care, and you did provide a couple of stocks. That’s why people love you Steve when I have you on the podcast, because you always have some great ideas. I heard you mention Pioneer and Diamond Back as oil players, kind of like a short China, or just avoid China and buy Mexico. In health care, is it the health insurers that we should focus on? And you don’t have to really get into any names and don’t give anything away that people are paying for in your newsletter, but is it the insurers that you’re going for in healthcare? Is there any names that you can share? Maybe not even in that sector, but other places that you’re looking?

Steve Koomar: Well, I want to give my subscribers a chance to read my report before going public with any specific names, but if you look at the health insurance specter and you look at those insurers, there are a number that are very attractively priced right now. So yeah, that’s an area that I would zero in on for your listeners.

Frank Curzio: And real quick with oil, because I know you mentioned Pioneer. Pioneer’s one of the biggest players within the Permian. There’s also I believe EOG Resources has exposure. Continental has a lot of exposure to the [inaudible 00:45:51], but you’re sticking with the Permian and Pioneer. I mean, that’s pretty much the kind of the jungle right there, right? When it comes to shell.

Steve Koomar: Yeah. I also like Diamond Back. What I like about them is, I like that they have all of their activities concentrated in the Delaware, in the Midland basins, which are the most productive areas. They have very substantial economies of scale. In those areas, the stack of layers of oil in the shell is just so much that these producers can extract from multiple layers at one time. And so, it’s the only place in the shell where you can get so much scale, that even companies like Exxon and Chevron, and Accidental want to be there.

In the past, those guys avoided the shell because there wasn’t enough scale for them. But, in the Permian, they can get the scale, and they can get their costs down very low. When you get cycles of oil prices going down significantly from time to time just as they’re going to go up significantly from time to time, you can weather the storm if you’re in the Permian with a company that has a very low debt profile. They’re always going to weather the storm. So, that’s really why I like the Permian. It’s always going to be there, it’s always going to be growing.

Oil companies, when costs go up, they very well may cut out some of the other basin activities. And so … so yeah, I do like Permian a lot. But I also like Diamond Back just the same. They’re both great. They’re both great.

Frank Curzio: Awesome, awesome. I know people love that you share the ideas. I love to get new ideas which is fantastic, and Steve, if people want to learn more about you or try to subscribe to your newsletter, how could they do that?

Steve Koomar: If they go to Vigilanteinvestor.com, they can read about me, read about my newsletter there.

Frank Curzio: All right, perfect. Well Steve, love having you on. I love having you on every quarter just to get your update, really great stuff. I’m a big fan of you and your newsletter so, again, I appreciate you taking the time coming on the podcast. I know my listeners love you, and hopefully you join us again soon.

Steve Koomar: You bet. Thanks a lot Frank, I appreciate it.

Frank Curzio: It’s great stuff from Steve. I love the new strategic order stuff. If you look at the global markets, it is a different landscape. We always say, “Well, history repeats itself,” it’s different. We have historically low interest rates, and they’re going to go lower and lower and lower. We have our administration, is placing big restrictions on countries when it comes to trade. We don’t see that often.

What I learned here, and this is going to be the educational segment, because we listened to two different opinions here, right? We heard Meb say, “Hey, you got to invest in international stocks, the cheapest they’ve been in 40 years,” and Steve come on and say, “Listen, I would avoid international stocks right now because those trends are going to get even worse.” But, what I learned from listening to both of them, which is what I want to do as an analyst guys, I want to get both sides of the story before I invest in everything, and you might say, “Frank that’s confusing,” and I get it. Believe me, I’ve been [inaudible 00:49:06] for 25 years.

Most subscribers just want you to say, “Hey, buy this stock here right now,” and tell you when to sell it which is a good thing for you, because if it goes higher, eh, probably won’t hear from you. But if it goes lower, I’m definitely going to hear from you. “Frank, what happened with this stock, I’m down 20%.” People want to be told what to do. They want to hear different opinions, that’s normal. That’s why you’re looking at Pardon the Interruption is so great, followed by Around the Horn on ESPN before that. And then I think there’s two more shows before that, and they talk about the same exact topics, they just have two different guests talking about their opinion, but people watch all those shows.

They just want to hear the opinion. They want to hear what people think of everything, and I get it. Sometimes people just want to be told, “Hey, this is what you need to do,” right? This is what I do. This is what people subscribe to my services for, but I’m taking you behind the scenes here. It’s very important, because whenever I research an idea, I’m looking at the sale ratings if I’m looking at the stock. Why do these guys have the stock, why don’t they like it? If I can say, “Well, the reasons why they don’t like it are not going to exist six months from now, then I think it’s a buy.”

If these guys are saying, “Hey, business is bad right now,” plus they’re having trouble with one of their customers which maybe I didn’t know, which was something that happens two years ago and it’s still ongoing, or whatever, which provide uncertainty, then maybe I won’t recommend it. But, you want to hear both sides at all times.

So, what I learned by listening to both of these guys, Meb and Steve is, the China trade dispute with the US, listen, it’s going to end, right? If it doesn’t, China’s economy’s going to collapse which we saw last year and saw earlier this year. Why? Because they’re going to lose their biggest trading partner, it makes sense. Or not lose them completely, but pretty much going to force the US to buy goods from other places.

If you run a business and your biggest customer accounts are 30% revenue, you lose them, see what happens to your business. That’s going to happen to China. The US on their side, I mean the US markets, now that tax reforms last year are pretty much factored in, now you’re going to see a lot of these companies, especially retailers that are warning, saying “Hey, are guidance doesn’t include anything on tariffs. So if they don’t figure it out with China, the US side, hey, looking at Trump, who’s going to have a tough time getting reelected.

We know that when people get reelected, it’s about the economy. Right now the economy’s good. If you have assets, you’re worth more now than you were when Trump took office. I don’t care if you hate him or not, but that’s how people vote. They won’t tell you they’re going to vote like that, but that’s how it’s going to vote. So, does Trump want to lose that momentum and keep messing with China? No. I figure that hey, you know that? They’re going to figure this out.

What I learned from Steve after listening to him which is really cool is, even if there is a resolution, US companies are moving their supply chains out of China right now. They’re moving not Taiwan and other cheaper countries which reduces their geopolitical risk. If you own company and you’re leveraged to China, and you’re basically sitting there on every tweet that the president has on whether things are good with China or bad in China, you know what? I want to remove that risk. Right away, I’m calling Taiwan, I’m calling all the countries and saying, “Okay, where’s the cheapest form of labor? How could I reduce my expenses? I’m going to move my whole supply chain over or some of the supply chain over. This way, I don’t have this crazy risk anymore in case China and Trump want to be stubborn forever.”

They’re starting to move that business over, which means even if they do solve the Trade dispute, China’s losing a lot of business right now, and that’s easily seen in its economic indicators across the board which are terrible, or horrible. You’re looking at Russia and Europe and other international markets, again, Meb was highlighting, great stats, great resurge how international stocks are at the cheapest levels compared to US stocks in over 40 years, but that’s been the last three, four years. Except it was, they’re the cheapest in 20 years now, the cheapest in 30 years now, the cheapest in 40 years.

When I look at these marks, I take a step back, again, after listening to both guys who are great analysts, taking all their data, I realize that if Europe was a stock… Eh, you could buy an ETF based on Europe, but if Europe was a stock that just traded on the New York stock exchange or whatever, I’d probably not buy it just simply based on fundamentals and growth, right? Because what kind of market are we in?

We’re still in a growth market. Value sucks right now, that’s the way it is. It’s tough to invest in value. Nobody wants value. Value stocks are going lower and lower, and lower. That’s fine. There’s going to be a time like in Uranium, and the resource sector there turned around where these things are fantastic to buy. That’s great. But if you’re looking at Europe and all the trends, it’s like buying a value stock right now, and value’s out of favor.

For me, it’s kind of like we’re seeing the resource market. I’d rather wait for confirmation that the trend has changed before I start investing in the sector industry, or in this case, a specific region. Resource stocks finally, we’ve seen a breakout. It’s 1400, but it’s more than just a breakout. I mean, you’re seeing our policy of lower interest rates is lighting a fire behind gold, and it’s probably going to go higher along with a lot of those stocks after, what, five, six years.

So you get that confirmation, fine, I’ll mist the first 20% move in some of these stocks that are down 85% over the past six years, big deal. At least I have the confirmation saying, “Okay, at least there’s demand there,” because you can say, “Hey, it’s a great buy,” three years ago, two years ago, a year ago, and you’re probably down 35, 40, 50% on these positions.

This is the way I’m looking at it, because I’m looking at China, and what does it mean for China? China’s stimulating its economy right now. Europe is also taking measures to improve growth. But, until we see actually confirmation of this where GDP surprise to the upside or Germany’s consumer confidence or retail sales turn positive, and the major industries in these countries start to get some mint behind them, that’s kind of when you want to invest.

And now look, you don’t always have to wait for a technical confirmation. If you’re a subscriber to any of my newsletters, you’ll see that I recommend companies like night transportation when everybody hated it. It was falling, there was no uptrend there, but the reason I why I recommended it, not only was it down sharply from its highs, but they were just integrating the merger with swift, so it’s going to result in huge cost savings, and those cost savings fall right to the bottom line, and insiders are buying.

So, those are two things I like to see. So, it’s not always like the technical part where you want … most of the times you want to see it break out, but you’ll see AVAV, our environments company we bought really cheap on the way down before it started trending higher and we’re up a ton on that, and VITAY’s another one, but you’ll see we recommend stocks and people will say, “Frank, wow that trend is really weak right now.” Yeah, but when I see the CEO buying three million dollars’ worth of shares and doubling his positions at this level, it gives me a confirmation of the person who knows the company the best is really putting a lot of money into that, that we’re pretty close to the bottom, he sees catalysts coming. Sometimes, not all the time. I want to see other things.

Yeah, but if it’s not insider buying, it can be a catalyst that I think is not being recognized in the stock right now, like huge buy backs from a company like Citi Group, which wasn’t factored into the stock when it was trading at 62, 63. A company that bought 10% of their shares outstanding over the past 12 months and buying another 10% of their shares outstanding over the next 12 to 18 months.

Outside of that, then I want to wait for that confirmation, that technical breakout. So for me, and hopefully I’m not beating this to death or I’m losing anyone, but I just want to take you behind the scenes here, because what you see is when I recommend the stock. I break it down and say this is why you’re going to buy it and this is where I see it going. Here’s a buy up to price, here’s a stop [inaudible 00:56:56] that we want to protect our capital, that’s what you see. That’s easy. That’s a nice 10, 12 page report I’m writing, get it out to you.

Behind the scenes, this is the research I’m doing before things get on paper, and I want to explain that to you because I know that you guys own stocks outside of my newsletters. You own stocks from other people recommending them, but this is how the research process is. You want to get two different opinions, or two opinions. You want to look at the positives and negatives yourself and decide whether you’re going to invest in the name or short it.

For me, when I look at all the information, I’m kind of leaning towards Steve side here. On the international front, I’d rather invest in Mexico, that makes more sense to me where they’re working with the US and are friends right now, than China with the trade dispute going on, and the country seeing tons of business moving … tons of companies anyway, moving their supply chains out of China right now. You’re seeing the economic indicators all point to negative, nothing’s really positive in China. If I look at Russia and Europe, I’d rather wait to see some kind of confirmation that things are turning around, because like we saw in 2014, 15, 16, 17, 18, through today, things could get a lot worse before they get better.

So, that’s how I’m approaching this. It’s not a zero sum game. I think you could … I don’t have a crystal ball. Both of these things, Mexico could go higher, international stocks could go higher, but if I have a choice between Mexico, investing in Europe, and investing in China, I’d probably invest in Mexico right now. That’s how I looked at that analysis. You may see it differently, and that’s cool. I will revisit this six months from now, nine months from now, a year from now to see. Again, I don’t have a crystal ball, I don’t know what’s going to happen. But for me, more information is good, as long as you’re digesting it, learning more, and that’s the research process.

Let me hear from you guys at Frank@curzioresearch.com if that section was a complete mess and you don’t get it, or if that made a lot of sense and it’s going to help you, because the bottom line is, I’m trying to help you invest outside of just reading a piece of paper and saying, “Wow, this guy likes it so I’m going to buy it.” In reality, yes you know me because I have this podcast and you listen to me all the time, but you see a lot of people out there, maybe they don’t have Google profiles, they don’t have anything out there. You can’t find anything and you might be listening to someone who’s just in a beach in Miami with someone else who’s writing his newsletter. That’s why you have to do your own research, no matter who you’re getting it from.

So hopefully that came across in that segment. If it didn’t my apologies, but you can let me know at Frank@curzioresearch.com. So guys, that’s it for me. Thank you so much for listening. I’ll see you guys in seven days. Take care.

Announcer: The information presented on Wall Street Unplugged is the opinion of its hosts and guests. You should not base your investment decisions solely on this broadcast. Remember, it’s your money and your responsibility. Wall Street Unplugged, produced by the Choose Yourself Podcast Network, the leader in podcasts produced to help you choose yourself.


Editor’s note: One big bank is cutting investors a $60 billion paycheck. It’s both an income and a growth play, making it Frank’s No. 1 financial sector pick today. But please read the report immediately. This stock won’t remain at today’s levels long…

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