Navigating Market Turbulence: Interest Rate Forecasts and Investment Strategies for a Dynamic Financial Landscape

Could your investment strategies withstand the shocks of a tumultuous market? Prepare to arm yourself with the insights and foresight shared as we explore the pivotal role of forecasting in finance, particularly focusing on interest rates and fixed income markets. This episode peels back the layers of past prediction pitfalls and steers toward the elements likely to steer interest rates come 2024. We'll dissect how these shifts could ripple through the deficit, government spending, and equity markets, arming you with knowledge to navigate the waves of change. Additionally, we're joined by expert analysts who shed light on the psychological maze of human biases in financial forecasting, using a Morningstar study as our guide to understand why even the most seasoned investors can veer off course.

Shifting gears, the episode zooms in on the health of financial markets, considering the impact of industry giants like Boeing and Apple on market volatility, Bitcoin's ETF buzz, and political chess moves that hold the keys to potential economic shifts. We unpack the FAA's grounding of Boeing and how it's shaking the Dow, while also highlighting the resilience of markets that continue to defy gravity. A sneak peek into the upcoming earnings season for banks provides a primer for the indicators that could signal interest rate adjustments and Fed maneuvers, setting the stage for savvy investors to act with precision.

In our final segment, we scrutinize the US Treasury's borrowing behavior and its profound influence on financial markets over the previous year. From long-term debt issuance to a pivot toward short-term bills, these strategies have sent shockwaves through stock and bond rallies, bond yields, and the dollar's value. Furthermore, we examine the role of money market funds in sustaining liquidity and how their actions echo in bank lending rates. This intricate dance between market expectations and the Fed's interest rate projections for 2024 unfolds before us, all while the labor market's condition sends signals about inflation and economic vigor. Tune in for a riveting journey through the financial landscape and uncover the investment opportunities waiting in the changing power grid.

** For informational and educational purposes only, not intended as investment advice. Views and opinions are subject to change without notice.

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Transcript

Alan Epper: 0:00

And now introducing Mr Keith Lanton.

Keith Lanton: 0:04

Good morning. Hope everyone had a nice weekend. Today is Monday, january 8th, first working Monday of 2021. I'm not too sure what to review, as the year just begins getting started, and not just review, but to think about going forward. A lot has even taken place just this past weekend.

Keith Lanton: 0:24

Things are always happening, changing the outlooks, re-examining what the future looks like, and we'll talk a lot about that this morning. We'll talk about forecasting. We'll also take a look at interest rates, fixed income markets, what happened last year with all the predictions about where interest rates would be and where they were, and perhaps why they acted the way they did. And then we'll take a look at what's going on this year, with expectations that the Federal Reserve may or may not be cutting interest rates six times or maybe three times, and we'll talk a lot about that and what may be driving interest rates in 2024. And, of course, the interest rates have a great impact on not just the bond market but also the deficit here in the United States and government spending. And, of course, the equity markets and the type of investments that do well in different interest rate environments and therefore have an impact on how we may want to structure portfolios. And then finish up talking about the cover story in Barons, which I think has a lot to do with the future, which is the power grid and how it's changing and what it may mean for us as consumers, as individuals, and us as investors, and how to possibly position our portfolios. Think about a industry that really has had very slow changes over the last 60, 70 years and suddenly maybe on the forefront of some dramatic changes and perhaps may change how we think about our investments. Some of these stocks have already had significant moves but may still be in the early innings of what's going to happen going forward, Certainly cover the bond market in the discussion that we have today.

Keith Lanton: 2:02

So I want to start out by thinking about something that we often see at the beginning of every new year and that's forecasts of what's going to take place over a future period of time. The new year is a milestone that we significantly use as a forecasting point, say, hey, what's going to go on in the future, and one who talked about from a Morningstar piece that they recently did some of the issues with trying to forecast and what we as humans perhaps may affect our thinking and why we are prone to mistakes, and also to think about the source, of course, in this day and age of social media and influencers, thinking about the source of who's saying what and what they're saying. Perhaps it's on CNBC or Fox Business News, and oftentimes you'll see lots of experts on there giving you their forecast. But think about what their financial position is. What drives them every day when they get into the office, what type of investor they are. Are they a bond shop? Are they a growth shop? Are they a value shop? And are they perhaps seeing the world through their own lens when you're seeing them espouse on television and sound so convincing? Or perhaps on YouTube, or perhaps in a Reels or TikTok video?

Keith Lanton: 3:16

So, talking about forecasting in November of 2022, morningstar points out that CNBC has 761 people who owned at least $1 million in investment assets. How stocks would perform over the next year, since the end of 2022, going into 2023, you know 2023 now in the books was a year where the S&P was up over 24%. Nasdaq was up 43%. So let's take a look at things with that historical backdrop. Well, 56% of millionaires who have accumulated a meaningful sum of money and perhaps, therefore, could be arguing that that's a measure of some intelligence. Perhaps not, but 56% of those millionaires said equities would lose at least 10% in 2023. And if you go back over the last 50 years, stocks have declined at least 10% only six times. So that was a bold prediction from over half of the millionaires. So even most of the survey participants were unusually insightful, able to predict an event with a 12% probability before it occurred. Or perhaps they were affected by some biases going into 2023. That affected what they said and obviously, with the benefit of hindsight, we know that their prognostications were way off the mark. And what's also interesting is the last time that millionaires were as bearish as they were in 2022, was at the end of 2008, which, in effect, gives millionaires a perfect record whenever they are that bearish, as they were going into 2000 and 22 and 2008. Well, equities have gone up in both instances.

Keith Lanton: 4:55

If you're looking at the S&P about 25% when you see that much negativity and perhaps one of the reasons for that is something called recency bias as it all endeavors, investment predictions are strongly affected by recency bias. For example, after a well publicized plane crash, airline travelers become wearier and their fears gradually dissipate along with the memory of the accident. Consumers are a fonder of large SUVs when gas prices are depressed, then they are when they're spiking. And when asked about the stock market prospects, retail investors are gloomiest after bear markets. Another issue may be something called group think, and group think is something that professionals those who look at the stock market some might call them economists or market strategists. They do investing in prognostications and predictions for a living. Most of them attended business schools where they were instructed to avoid things like recency bias, so perhaps they're more prone to something like group think.

Keith Lanton: 5:59

And if we look at the predictions from the market professionals, their predictions are often steadier, for example when looking backwards between what they think and what the millionaires think. But their track record, while better, is still something not to be desired. So if we look at the professionals going into 2023, the projections among 20 Wall Street firms going into 2023 was that the S&P would not be down 10% but would be up 4.5%, which is actually slightly more conservative than usual, but certainly a lot better than what retail investors predicted from the millionaires. So clearly the professionals, while better than the millionaires, not so good, considering they missed the S&P by about 20%. And where professionals run into trouble often is with their thinking regarding economic forecasts, which, of course, are extraordinarily difficult and challenging to arrive at, but Professionals, what they do is they take a look at economic forecasts and then they work forward and say, hey, I think Mark is going to perform like this, because I think the economy is going to perform like that.

Keith Lanton: 7:04

So in October of 22, the investment professionals were not looking for a very good year for the US economy. Wall Street's strategist said that the gross domestic product going into 2022 would be a very puny 0.2% growth rate. Only 11 of 78 respondents and these are market professionals predicted a growth rate that equaled or exceeded the 50 year annualized average of 2.6%, which is pretty much what 2023 came in at. So these professionals largely expect the GDP to be anemic and therefore they expected equity returns to be very muted. Constantly. Those who use the economic predictions to guide their investments certainly suffered for their decision.

Keith Lanton: 7:50

Typically, the arrival of a recession is accompanied by bond market strength and stock market weakness, albeit with relatively good showing from recession resistant equities like consumer staples, health care and utilities and these are the sectors that Wall Street was saying were lined up to perform well in 2023, when, in fact, in 2020-2023, the exact opposite occurred Long bond struggled to break even, while equity soared, conspicuously absent from the stock market rally, whoever were businesses from those defensive sectors. Now, if you look backwards, those economic economic spheres were justified. They were correct that we would continue to have an inverted yield curve, which is when short-term interest rates are higher than long-term interest rates and they are corrected. That usually presages a recession. But the economists and professionals they failed to anticipate the exceptions, that perhaps this inverted yield curve again with the benefit of being able to Monday morning quarterback was due to some unique factors that were associated with the Demic and therefore what was anticipated and what had happened in the past did not happen in 2023. And the same type of group think is what caused the economists to miss the 2021 inflation spike.

Keith Lanton: 9:09

Another factor that we suffer from when trying to ascertain what the future will look like is something that is called wishful thinking, and with wishful thinking, portfolio managers and folks who look backwards like to look back and say that there was something very simple like one trend driving things. It's much easier to be able to put things into a very simple basket and ascribe all the performance in a given year to one or two trends. And if you look back at 2023, the trend that most people are putting into one basket was hey, this was the year of the magnificent seven. And if you look at 2022, well, that was the year of cash. Avoid stocks and bonds. In 2023, that was the year where you shouldn't have been buying growth stocks. So what's going on here? Going into 2024? We see what the trends were.

Keith Lanton: 10:02

Looking backwards, well, it seems like in 2024, what the experts are telling us is that this is a year of stock pickers. Bank of America's strategy say that 2024 will be a quote unquote stock pickers paradise. Black Rock's Chief Investment Officer of Global Fundamental Equities says that 2024 is shaping up to be a finance of a stock picker. Leon Cooperman states that we are entering a stock pickers market, and Toronto's Dennis Mitchell claims the same for the Canadian marketplace. So no doubt there is actual analysis intermixed with the wishful thinking, but don't overlook the powerful influence of the latter.

Keith Lanton: 10:43

It's that reason that you may want to discount forecasts of economic booms from growth stock managers and economic busts from bond fund leaders. Case in point, the bill grosses down the prognosis of a slow growth, new normal that would allegedly depress equity returns, just as stocks are entering a bull market, and you may want to think about whether, if you're listening to a growth fund manager stating that you're on the precipice of a continuing boom for growth stocks, or, on the flip side, if you're hearing a value fund manager talking on Fox News or CNBC talking about that, things are all lined up perfectly for value stocks. So you may want to give those thoughts as we enter 2024. Is it a stock pickers market? If it is, what type of stock pickers market is it? That doesn't mean, for example, perhaps, though, that you shouldn't listen to these folks, that they are simply spewing hot air. These are very often successful investors who are intelligent and have well thought out thesis, but what you might want to do is, as opposed to listening to their conclusions, follow their arguments, rather their advice. Understanding the logic behind the prophecy is an excellent way of learning more about investments and the general economy. So, with that thought process of where things perhaps will be going in 2024.

Keith Lanton: 12:00

A lot of that may or may not be interest rate driven, and we'll talk about that. We'll talk about where things look at the moment this morning, and then we'll talk about the bond market to some extent. So this morning, things are being driven to a large extent in the Dow by Boeing. Dow futures down about 120 points. S&p futures up about 100 points. Nasdaq futures at their best level of the morning, up about 23 points. The Dow headed to that loss because Boeing, guided by the FAA, to ground dozens of their 737 MAX9 aircraft in response to an incident on Alaska flight 1282. So we're seeing that weakness in Boeing down about 20 points this morning, driving the Dow lower but absent. Boeing markets are showing a slight bias to the upside. Speaking specifically about Boeing, last I looked at it was down about 19 points, or 7%. Alaska Airlines down about 5% or 2 points and the company that manufactured the fuselage part that suffered the blowout on the Alaska Air Flight is Spirit Aero Systems, symbol SPR. That stock trading around 26, down almost 5.5 points, or 17%.

Keith Lanton: 13:12

Other companies in the news Apple Computer, this morning being reiterated and outperformed with a $220 price target over at Evercore. Apple, also in the news this morning, as Jeffries is reporting that iPhone sales in China fell 30% in the first week of 2024, adding to signs of growing competitive pressures from domestic rivals such as Huawei or Apple in China. If you're thinking, perhaps, that the overall Chinese market is weak, you are correct, but if you look at Huawei sales. They're about flat, so nothing to write home about, but nevertheless flat versus down 30% in the case that Apple is experiencing some meaningful headwinds in the Chinese market. Other companies in the news this morning in Vidya they are aiming to introduce a China artificial intelligence chip in the second quarter. These buyers are pushing back against lower priced artificial intelligence chips that, according to Bloomberg, lululemon raised fourth quarter guidance. Perhaps not as much as the street was hoping, since that stock is down 8 points 1.7% on that news, which looks like great news. In other news, a new Vulcan rocket sends a privately built moon lander to space. This robotic lander was built by a private company and is bound for the mooning attempt to make the first US lunar soft landing in more than half a century. After launching into space aboard a new Vulcan rocket debuted by a joint venture of Boeing and Lockheed Martin.

Keith Lanton: 14:48

Other news or events to keep an eye on this week New York Times reporting Supreme Court will hear a case on February 8 regarding Colorado's decision to remove Donald Trump from the ballot. Donald Trump has a wide lead in Iowa, one week ahead of the first Republican caucus. Bill this morning is down almost $2 a barrel. Saudi Arabia is aiming to lower crude prices in all regions. The big event over the weekend is that lawmakers have reached a $1.66 trillion budget deal. Congress must pass the bill by January 19 to avoid a government shutdown. According to the New York Times, white House is reporting that the government funding agreement reflects figures that were negotiated last year, largely with Speaker McCarthy, who was pushed out of office as a result of some of those discussions. So we'll see if the Republican Party is behind the new speaker on these agreements.

Keith Lanton: 15:44

Looking forward to this week, one of the events taking place this week is that on January 10, so in two days the SEC may be giving us some guidance on whether or not we will see a Bitcoin ETF. The Bitcoin ETF companies that are seeking to initiate a marketplace offering of a ETF for this commodity are having till today to finalize their submissions. Expectations are that one company could possibly get the green light after many false starts. This is not necessarily a path to riches. Barron's reporting. The company has disclosed that its wise origin Bitcoin ETF will charge just 39 basis points annually in expense fees. Invesco and CryptoFirm Galaxy said that they plan to charge 59 basis points for their Invesco Galaxy Bitcoin ETF, although that fee will be waived for six months on the first $5 billion in assets, and a dozen or so companies have applied to the SEC to offer spot Bitcoin ETFs, so competition may be fierce.

Keith Lanton: 16:49

So this week, on Thursday, bureau of Labor Statistics is releasing the Consumer Price Index for December. Consensus estimates is for the CPI to increase 3.2% year over year, one-tenth of a percentage point more than November. Core CPI, excludes volatile food and energy, is expected to rise 3.8% compared with a 4% gain previously. Friday, fourth quarter earnings season begins in earnest, with the four largest US banks by assets announcing results Bank of America, citigroup, jp Morgan and Wells Fargo all report before the opening bell. Jp Morgan was the best performer of the group last year, returning 30.6%. Bank of America stock trailed partially on concerns over unrealized losses on its large bond portfolio 20 items that analysts will be looking for guidance on from Bank of America. Also reporting earnings on Friday is the largest custodian of assets in the United States, which is Bank of New York. Also on Friday, we will get the producer price index for December, looking for a 1.3% year over year rise in PPI and a 1.9% increase for core PPI. You'll notice, and we'll talk about this a little bit, when we talk about interest rates, that big divergence is going on right now between CPI and PPI Consumer price index running close to 4%, the PPI producer price index running close to 2%, and a lot of that difference could be attributed to differences in the wages that are being paid to individuals and wage growth, and this is something that the Fed will be keeping their eyes on. So, talking about interest rates, I said Brad wouldn't be on the call so I'm going to address interest rates in general.

Keith Lanton: 18:30

Barron, looking backwards at last year, which I think will give us some insight into looking forwards and to this year, had an article entitled the US Treasury Helped Fuel a Massive Stock and Bond Rally. Don't Expect a Repeat. So a largely hidden but still important spur to the late 2023 rally in bonds and stocks. Barron says it's going to reverse, while investors will be tracking every nuance in the speaking of the Federal Reserve Chairman, jerome Powell. Thank you. The impact of treasury borrowing to finance the deficit is largely out of the public's view, but it was a major force in the sharp rise in bond yields and the resulting slump in stocks late last summer and into the fall, and an underappreciated factor in the rebounds of the debt and equity markets in the last two months of last year. It is rare that big market reversals can be pinned on a single event. That coming from Stratigus's Washington policy team. They wrote in a report over New Year's Eve.

Keith Lanton: 19:26

But the treasury's decision last August to issue more longer term debt the first time in three years, led to a sharp tightening in financial conditions, reflected by a rise in bond yields, rise in the dollar and a slump in stocks. Federal Reserve took notice and in November the Fed said specifically on November 1st, fed and the treasury trimmed their plans to issue more long term debt. And on top of that, at the same time Chairman Powell acknowledged that the Fed was likely done raising short term interest rates and that was the catalyst for the year end stock and bond rally. And it's remarkable because one of the grave concerns that was causing the rise in yields was the increasing federal debt. And the federal debt has marched on consistently throughout this entire scenario where yields are rising and then falling.

Keith Lanton: 20:14

The federal debt then suddenly stopped falling. Federal debt hit $34 trillion, an increase of $1 trillion since just mid-September. Total federal debt is 120% of the size of the US economy. That's at a time of full employment and no declared war, circumstances that would suggest close to a balanced budget or even a surplus, and that's not something we've seen since the early 2000s. Yet that massive tide of red ink, which spooks, bond and stock markets back in the dog days of summer summer, suddenly have receded from the market's mind.

Keith Lanton: 20:47

Arguably that was made possible by the Treasury's decision to shift borrowing to short term bills in the beginning of November. But there are only so many times you can use this technique. This maneuver allowed the Treasury to buy time by issuing trillions upon trillions of paper. That was short term in nature, but nevertheless, now that one time trick or that one time change, I should say, is no longer available to create another catalyst or change in sentiment among bond investors. But what has been taking place is the Fed has changed their borrowings to short term.

Keith Lanton: 21:27

Is that this short term liquidity is getting sucked up by all the money that's being parked in money market funds, and these money market funds previously provided liquidity to borrowers who were seeking to borrow funds, and these money market funds would be lenders.

Keith Lanton: 21:44

And what has happened is that these money market funds have been shifting so much to purchasing treasuries and not lending money out, for example, to banks like JP Morgan and Goldman Sachs. The cost for these banks to finance their treasuries has increased about 1.45% in the last few months. What this indicates is that there is a tightening taking place in the money market space, so what this means is all this liquidity that moved into money markets, which was available to purchase treasuries, is getting used up, because previously the banks had enough money. These money market funds had enough money to both buy treasuries and lend money to banks. The fact that the rates that they're charging banks is increasing while interest rates are not increasing is indicative of the fact that they don't have a lot more money to lend which means a lot of the money that they had set aside to invest in treasuries and short term treasuries has been invested.

Keith Lanton: 22:34

So it'll be interesting to see if we continue to run up our deficit and we continue to finance it with short term debt. Whether or not there is enough liquidity or money to keep buying these treasuries without raising rates is something that markets will be keeping a close eye on. So we talked about the past, what happened last year, what we want to look forward to for the future, and thinking about the future, all eyes are on what the Federal Reserve is going to do in 2024. The stock market has predicted nine of the past five recessions. The late economist Paul Samuel Flynn famously said is the futures market. Bonds now are earning similarly by pricing in six of the Federal Reserve's next three interest rate cuts. Fed Fund's futures settled Friday at levels consistent with a three and three-quarter to four percent target range for the central bank's key interest rate policy by December. But this is consistent with the median expectation of the Federal Open Market Committee, but for the end of 2025, not 2024. For this coming December, the most recent projections from Chairman Jerome Powell and the rest of the Fed released last month had a median projection implying three reductions of one quarter of a point from the current target of five and a quarter to five and a half percent. Futures market expects the first cut to come just after the Bernal Equinox at the conclusion of the March 29, march 20, fomc meeting. No move is expected at the Federal Open Market Committee meeting this month, but the market is very excited about what the potential is going to take place in the spring.

Keith Lanton: 24:10

The notion that the Fed will begin to reverse monetary tightening is based on the hypothesis that inflation is slowing toward its two percent target, while the economy's strength is waning, especially as reflected by the labor market. While the pace of price increases has indeed decelerated, monetary policy's impact on demand has been less than the loosening of supply constraints and the easing in energy prices. Again, back to that CPI versus CPIA alluded to earlier. The labor market, if anything, shows signs of tightness, with upward pressure on wages, last week received an employment report for December on Friday showing that non-farm payrolls rose 216,000 above, about 40,000 above forecast. Now that was offset by downward revisions of 71,000 for the previous two months. Taken together, though, the 165,000 average monthly increase in payrolls was roughly the pace of mid-2022. Latest increase in job rolls was also offset by a dip in the average work week, which dropped about one-tenth of an hour to 34.3, and the unemployment rate held steady at 3.7 percent. And that was due to a sharp drop of 676,000 in the labor force, which nearly matched the 683,000 decline in the number of job holders in this tally. As a result, the labor force participation rate dropped sharply to 62.5 percent of the adult population in December.

Keith Lanton: 25:33

Pay picked up, though. Average hourly earnings increased four-tenths of a percent in the latest month, which matched November's increase Measured from a year earlier. Wages are up 4.1 percent in December. Peering at the particular is pay gains have been especially strong on the factory floor, and this is what we want to think about going forward. Wages for non-supervisory workers in manufacturing climbed nine-tenths of a percent in December, on top of an eight-tenth of one percent bump in November. Those gains are the fastest manufacturing pay in 40 years and those rises can be traced to the UAW agreement with US workers. Remember that the non-union wage increase of 10 percent or more at Toyota, honda, tesla and others followed the UAW agreements that took effect in January. So substantial wage gains are likely to continue going forward because we saw the non-union workers receive wage gains at the end of last year and we're going to see union workers receive those wage gains beginning in January of this year. This possibly makes it less likely that we will see a decrease in inflation going forward, at least from the wage standpoint Wages, at least from the manufacturing sector. We have a headwind in terms of getting that inflation target down to two percent if we are going to see consistently higher wages from manufacturing, which is already baked into the cake based on the union agreement, which will be therefore a meaningful headwind to get inflation down. Which also means that, in order for the Fed to get close to that two percent inflation target, we'll need to see material weakness in other sectors of the economy in order to achieve a two percent target inflation rate, which means that it may be very difficult to get those six-rate cuts that the markets are expecting, versus the three that the Fed says they think are coming. Finally, I will conclude talking about the future and perhaps some investment opportunities in the power grid, thank you, what it means for utility stocks and your electric bill.

Keith Lanton: 27:35

Think about the grid of the future and what it will look like. Well, let's back up and say well, what is the grid? The grid refers to everything that goes into the production, storage, transmission, distribution and consumption of electricity, and it's set to go through big changes. Production of electricity will have to increase as power hungry data centers proliferate, along with electric vehicles, and as home heating and cooling go electric Think heat pumps. The sources of all that electricity will shift to more renewable sources like solar and wind, which will also necessitate more energy storage assets Think batteries as well as more robust transmission lines. Behind the curtain will be more software and AI artificial intelligence tools coordinating it all. For us as homeowners, it means more complexity in exchange for a lower total energy bill. For utilities, it means the potential for growth, and for the companies that build grid infrastructure, make the electrical hardware and write the software to control it, it means potential for big opportunities.

Keith Lanton: 28:38

Not much has changed for the power grid. Over the past several decades, us has consumed about 4 trillion kilowatt hours of electricity in 2022. A record. But overall demand has been sluggish Just four tenths of a percent growth annually since 2000. Think about it Very little growth in electricity demand and about 60 percent of our electricity from the quote unquote grid comes from burning coal and natural gas, 20 percent from nuclear, 20 percent from renewable. The subdued demand growth has meant that the industry has been focused on maintaining existing assets and not investing in the future. The transformers those buzzing boxes that you hear that convert voltage into levels that can be used in homes and offices are essentially identical to the transformers that were used 20 years ago. Electric utilities have spent about 134 billion a year on maintaining the existing grid, and that is going to change going forward. Complacency is not going to cut it in the future, and this is where the opportunities are in the investment space. Data centers are growing. There's more data moves to the cloud. Ai computers are power hungry, needing five or six times more power compared with their less sophisticated computing ancestors. Heat pumps are replacing conventional heating and air conditioning, shifting demand from natural gas and heating oil to the grid.

Keith Lanton: 29:59

While the transition away from internal combustion engines to EV hasn't happened as quickly as imagined, it's still happening. Empowering all those cars will take a lot of electricity. Right now, evs account for less than one percent of total electric demand. That could go anywhere to five to 15 percent by 2050, depending on the pace of EV adoption. So think about it. If you're thinking about, you know, your furnace, which was previously powered by oil or natural gas. If you're thinking about your car powered by gasoline. The need for power is not going away, but the way that you receive that power is changing. It's going to come from the sources coming into the home or generated at the home. Therefore, electricity use could grow by two percent a year over the next decade, ending years of stagnation.

Keith Lanton: 30:45

As this change takes place, reaves Asset Management analyst Jay Rehm says every utility actually CEO says every utility is a story where demand growth is the highest it has been in forever. Demand isn't the only thing that's changing. So is how electricity is produced. In the past, coal or gas fired plants would be cranked up as needed to deliver electricity, but going forward, we're going to rely a lot more on renewables. Those renewables are a lot less reliable in terms of when they're on and off, so therefore the need to store that energy will be critically important. Production is also going to be decentralized. Utilities will still generate the bulk of electricity, but will come from the Walmart store with a solar roof, a Tesla owner with a battery backup or a homeowner with a standby generator, may perhaps made by a company like Generac. They're all potential producers that will send electricity to the grid at times of peak demand. So the grid has got to be slightly bigger but a lot smarter.

Keith Lanton: 31:44

So, if you're thinking going forward, what does this mean for investment opportunities? Here are a couple of ideas from Barron. They say take a look at Next Era Energy, symbol NEE. With about 34 gigawatts of clean energy generating capacity, it's already the largest producer of utility scale renewable power in the US, with about 10% of total US non-nuclear renewable capacity. More importantly for investors, it's grown earnings at a rate of about 11% over the past three years. Wall Street has dialed down those expectations to about 7% a year over the next three years and that's reflected in the stock which is sold off recently but now trades at about 18 times forward earnings, down from a three-year average of about 26 times earnings.

Keith Lanton: 32:23

Barron's also just taking a look at American Electric Power, symbol EEP. One of the largest utilities in the US serves more than 5 million customers across 11 states, including Oklahoma, texas and Tennessee. Those states are among the fastest growing and power demand is increasing with that population growth. Aep expects to see electricity growth demand at about 6% annually over the next three years, trading around 15 times earnings, down from about 18 times a couple years ago. Growth has already started to show up from the established suppliers of electrical components for, including Hubble Eaton and Francis Schneider Electric.

Keith Lanton: 33:00

What Barron says is not to expect is don't expect there to be a huge increase in demand for rooftop solar, suggesting that rooftop solar represents just about 3% of total US generating capacity. So certainly there will be more folk utilizing the services of companies like Sunpower and Sinover, but that will not be the primary growth engine in terms of renewable power in this country. On the other hand, they say consider First Solar, which is a utility-scale solar technology provider. It is a market capitalization of about $18 billion and is profitable. Sales and earnings for First Solar symbol, fslr, expected to grow at about 25% and 60% a year on average respectively over the coming three years. Shares trade for 13 times 2024 earnings. Because sales and earnings tend to be cyclical and tied to government policy. The future could make some of these stocks and could is the proverbial word in the future.

Alan Epper: 33:59

That's everything I've got. Thank you for listening to Mr Keith Lanton. This podcast is available on most platforms, including Apple Podcasts, Spotify and Pandora. For more information, please visit our website at www. heroldlantern. com.

Sophie Coehn: 34:20

Opinions expressed herein are subject to change and not necessarily the opinion of the firm. Past performance is no guarantee of future results. The information presented herein is for informational purposes only and is not intended to provide personal investment advice. It is important that you consider your tolerance for risk and investment goals when making investment decisions. Investing in securities does involve risk and the potential of losing money. The material does not constitute research, investment advice or trade recommendations.