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Is it the great rotation? Not necessarily

Pimco CEO Mohamed El-Erian talks about what might move interest rates up, and Rob Lauzon checks in with his picks for the oil and gas sector

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at mfawcett@albertaventure.com

Mar 13, 2013

by Max Fawcett

With many major indices at or near record highs, are we in the midst of the so-called “Great Rotation” out of bonds and into stocks that market watchers have been talking about for the last year or so? Not necessarily, says Mohamed El-Erian. In an interview with BNN, the Pimco CEO said he and his firm think US treasuries – the most visible proxy for the bond market as a whole – will remain range bound over the near term. ““The U.S. economy remains structurally impaired,” El-Erian said. “The U.S. economy is in no position as yet to sprint. It can heal, it can walk, but it cannot sprint.”

More to the point, he said, the move out of bonds won’t necessarily precipitate a move into stocks. It depends, he said, on one’s view of why interest rates (the key mover of the bond markets) would start to rise – and he thinks people ought to tailor their portfolios accordingly. “If you believe that rates are going to go up because of a handoff, because we’re going to make that transition from assisted growth to generated growth, you get more exposure in risk assets. If you believe rates are going to go up because of inflation – after all, we’re pumping a ton of liquidity into the system – you invest in inflation-protected assets. If you believe it’s because the US is about to lose its credit rating, you stay in cash.”

Pimco’s view is that if rates do rise it will be because of the second reason, but if you’re a fan of the first you need to see the economy reach what he calls “escape velocity.” He doesn’t see that happening this year. “In order to reach escape velocity, we need the political system to stop fabricating crisis after crisis…and we need it to create tailwinds by addressing some of the structural impediments. Unfortunately, we do not see Washington DC (and Congress in particular) collaborating enough for that to happen.”

Closer to home, Rob Lauzon, the managing director of western Canada for the Middlefield Group, was on Market Call to talk about oil and gas stocks. In terms of his macro view, he thinks the worst may be behind the Canadian energy sector. “In general, we think we’ve formed a bottom in Q1 this year. The worst news is out there, the differentials were the widest, so I think it’s time to look more positive here on the Canadian energy market.” Lauzon said the fact that larger and more liquid names like Suncor (TSE:SU) and Canadian Natural Resources (TSE:CNQ) are starting to see some buying suggests that the trend has turned. “Typically, when you get sector rotation, it starts at the top and moves down market to mid- and small-caps,” he said.

In terms of specific companies, his top picks on the day were Cequence Energy (TSE:CQE), which he liked for its leverage to recovering natural gas prices, and Crew Energy (TSE: CR), which he said has worked through its problems on the oil side of its portfolio and is building out some interesting gas assets in the Montney and Deep basins. He thinks Cequence can be a $2-plus stock “in the right gas environment,” while Crew can trade in the $8 to $9 range.

Some other observations:

On Enerplus (TSE:ERF): “We’ve been picking away at Enerplus over the last half year in that $12 to $14 range, for many reasons. They’ve cut their dividend to a more sustainable level , they’ve done some asset sales, and I think they’re positioned more positively than we’ve seen in the last few years for the future.”

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On Legacy (TSE:LEG): “One positive was that their recent debt deal was taken up by mostly pension funds. Now that they’ve got pension fund backing, that makes us feel more comfortable with the story. If they ever need to go back to the market, for either equity or debt, they might have a very deep wallet alongside them.”

On Athabasca Oil (TSE:ATH): “When you move from that kind of company to a growth company there’s going to be some hiccups along the way with managing people and getting production targets met, but I think they’re on the right track. If you can buy Athabasca below $10, where it is today, that’s good value.”

 

 

 

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