Steve McDonald: Hi, everybody. I'm Steve McDonald. Welcome. This is going to be a mouthful, so bear with me, guys. Don't laugh at me. This is the Stowe Mountain Oxford Club Private Wealth Seminar Editors Roundtable. I made it.

Marc Lichtenfeld: Nicely done.

Steve McDonald: I've only done that about six times trying to rehearse it. We have with us today Marc Lichtenfeld, our biotech guru and our dividend stock guy. And, of course, the best stock picker I've ever known, Alex Green. Why do you always laugh when I say that?

Alex Green: You always say that.

Steve McDonald: I'm dead serious. Well, I've never seen anybody pick and analyze stocks as well as you do.

Alex Green: Oh. You're very kind. Thank you.

Steve McDonald: I worked with some of the best at Legg Mason. You know who I'm talking about.

Alex Green: Yeah, BM.

Steve McDonald: Big Bill. With us is our energy guru, Dave Fessler, who has promised not to talk about solar today, is that correct?

Dave Fessler: I'm not going to talk about solar.

Alex Green: He's staying out of the sun.

Steve McDonald: He's staying out of the sun. The topic, the topic - if we can possibly stay on one this time, we normally can't - is, "What's the most underrated investment of 2016?" We're going to yield to our investment director, Alex.

Alex Green: Well, I think what the most underrated investment of 2016 is, is the stock market. For years after the financial crisis, I was going around saying, this is the most unappreciated bull market in history because people just simply didn't believe it. First it was because the financial crisis was so bad and they thought maybe this is just a bear market bounce and things really aren't that good.

We'd gotten to a period where stocks weren't going anywhere, and now here we are. The market hit a new all-time high recently. I think the thing that's underrated is people really still don't get that there's nothing to be made in cash, very little yield in bonds, and stocks are still reasonably priced and the prospects are relatively good. So I think what's underappreciated is equities.

Steve McDonald: I couldn't agree with you more. In fact, I'm very concerned that because the market has hit new highs, because it's now getting the attention, because there's $55 trillion sitting on the sidelines - that's an amazing number - I'm afraid that the little guy is now going to get stock fever and start buying as we're hitting new highs because that's normally what brings them in.

Alex Green: Well, when that happens we'll know it's time to trim back our equity exposure. But you know, John Templeton famously said that bull markets are born on pessimism, grow on skepticism, peak on optimism and die on euphoria. So no one's feeling euphoric right now. They're somewhere between skeptical and optimistic, but when we hit that point where people think stocks are the only place to be, then it'll be time to pull back substantially in your equity exposure.

Steve McDonald: Marc?

Marc Lichtenfeld: I think one of the most underrated plays right now - and it might surprise you that I'm saying this - is biotech because the valuation went crazy last year in 2015. The sector was very, very hot and valuations were really ridiculous. This year, the sector has grossly underperformed the overall market. It's really lagged quite badly.

As a result, those valuations have come in, and there's kind of a cap, I think, right now for the next few months until the election is settled. I actually talked about this a little bit today, here in Vermont. I think that people are going to have a hard time getting onboard with biotech until the election is settled. Once they do, I think some of these stocks could really go for a nice run.

Steve McDonald: Biotech is driven by new ideas, but will it - you know, all boats float with a rising tide - is it going to move up if the whole market moves up, as it is moving up?

Marc Lichtenfeld: It really hasn't this year. Again, I think we have to wait until after the election, probably 2017. Who knows what happens with the overall market at that point. If Alex is right and the whole market keeps going, then, yeah, it should go and I would say even probably outperform because it's been lagging. It's like a coiled spring right now. It could stay coiled for a little bit longer. We'll have to see. But right now, the election is definitely putting a cap on things because Hillary has said she wants to put a cap on drug prices. So that's the big reason.

Steve McDonald: I know you're a Hillary lover, Dave.

Alex Green: Cut.

[Laughter]

Steve McDonald: You're up.

Dave Fessler: I'm not going to -

Steve McDonald: Don't go there. We don't need the negative emails -

Dave Fessler: - go there. You're trying to create waves here. No. Actually I'm going to say the energy sector, not just because that's what I write about, but more specifically master limited partnerships. Last year, when the oil and gas sector got hammered, oil prices fell through the floor. Everybody sold anything with oil or gas in the name and asked questions later.

A lot of the midstream master limited partnerships got hammered. Well, all master limited partnerships got hammered, but they specifically did. The ones that have not just pipeline assets but also wholesale marketing and distribution assets are doing remarkably well and they're extremely undervalued right now. Some of these MLPs pay in the range of 6% to 8% and some even 5%, 10%. It's a very, very safe investment particularly in light of the amount of income that you get.

Steve McDonald: Are you talking about pipelines?

Dave Fessler: Pipelines, terminaling facilities (where the pipelines link to), storage tanks and a lot of these vertically integrated master limited partnerships have all three.

Steve McDonald: Right. Well, let me ask you a question - this is what I don't understand. Before the Saudis crushed the market, everyone described these pipelines - whether they were limited partnership or just the common stock - everyone said, "Oh, these will never go down because no matter what the price of oil does, you got to pump it through something that's got to be stored somewhere. It's got to come off the ship and go into the ship." Then all of a sudden, whack. Williams Cos. (NYSE: WMB) drops from what? $70 to $10?

Dave Fessler: Sure, and Kinder Morgan (NYSE: KMI) -

Steve McDonald: Kinder Morgan and all these so-called "nothing can ever happen to these." What happened?

Dave Fessler: It's just the, I think, the ignorance of investors -

Steve McDonald: Well, don't sugarcoat it. Go ahead and just tell us.

Dave Fessler: I'm serious. They don't understand that their price is not driven by the price of the underlying commodity that they're pumping through the pipeline. It's driven by the volume of the commodity that they move through the pipeline and their terminals and storage facilities and everything else. They just threw out the baby with the bathwater and created these tremendous bargains.

Marc Lichtenfeld: Yeah, because many of these MLPs, they didn't see a decline in revenue or cash flow, just stock price.

Steve McDonald: And it was a perception of how they were structured. I remember when all this criticism about Williams was coming out. One month, everybody's saying Williams is the greatest company since sliced bread and the next month, oh, this model can't work. They're midstream and blah, blah, blah. It's like, "Who's right?"

Dave Fessler: It's pretty amazing. Some of the MLPs have distribution cash flow ratios of 1.5 or more times the amount of the distribution. So, they've got some tremendous room to grow their distributions and they have plans on doing that.

Steve McDonald: Next question. What's driving these things? What's driving stocks?

Alex Green: Well, lots of good things. We have very low inflation. Practically negligible, which, if you think back to the early '80s, the great enemy of both stock and bond investors is high inflation. We have not just rock-bottom interest rates. We have negative interest rates in Japan and Germany and Switzerland and other parts of the world. That makes it cheaper for companies to borrow. Makes it cheaper for the government to borrow. Makes it cheaper for consumers to borrow. That's a plus. Also makes cash unattractive relative to equities.

We have these ultra-cheap energy prices. That makes it cheaper to drive, cheaper to fly, cheaper to heat and cool your home, office, factory. We have companies buying back an average of $30 billion a month worth of shares. When you take higher earnings and divide them by a lower number of shares outstanding, you get even stronger growth and earnings per share.

Also, don't discount again this negative sentiment. The old saying is "bull markets climb a wall of worry." The sentiment is still so negative out there that you don't really see a bull market top until everybody climbs onboard. When mom and pop's in there. When people are bragging at cocktail parties how much their stock portfolios are up. That's the beginning of the end if not the end itself.

Steve McDonald: It is the end.

Alex Green: All right. So we do have good things out there, and obviously the market is signaling and the jobs growth that we're seeing is signaling that the second half of the year is going to be better from an economic growth standpoint than the first half was.

Steve McDonald: Biotech.

Marc Lichtenfeld: I think it really goes back to one tweet that Hillary Clinton made several months ago - and you and I have talked about this many times - when after the whole Martin Shkreli pharma bro thing came where he's the executive who raised the price of a 40-year-old drug from $15 a pill to $750, Hillary Clinton tweeted basically something has to be done about this. And she was going to try to cap some drug prices and has investors understandably very scared that these companies - that in some cases have very expensive drugs - will not be able to get those prices for those drugs. I don't think it's going to happen that way.

I think any company that has an innovative new drug that does something different than what's on the market is still going to be able to get premium pricing. I think if there's any kind of cap on prices it'll be that kind of drug that she was tweeting about where you have a drug that's maybe 20 years old, that's off-patent, that doesn't have generic competition. Maybe at that point, they start putting a cap on some prices.

So a company like Valeant Pharmaceuticals (NYSE: VRX), whose whole business model was taking old drugs and jacking up the prices, maybe companies like that will suffer. But innovative companies? I would be shocked if they're not allowed to charge premium pricing for truly innovative drugs.

Dave Fessler: A lot of those drugs aren't - well, maybe not a lot - but some of those high-priced drugs are for diseases that not a lot of people have or are afflicted by.

Marc Lichtenfeld: Rare diseases get extreme premium pricing - hundreds of thousands of dollars - but as you were saying, there might only be 1,000 to 2,000 people in the country that are even on that kind of a drug.

Steve McDonald: Dave, what's driving pipelines back? MLPs -

Dave Fessler: Well, I think what's driving them back or what drove them down?

Steve McDonald: What's driving them back?

Dave Fessler: What's driving them back is there are some people out there that are finally realizing what a bargain they are. Nothing's changed, as Marc said earlier. They've still been making money all along happily throughout all of this contagion that we've had in the oil and gas industry.

It's just that investors are now finally realizing that, "Wow, look at this yield I could be getting and I can get it for half of what it cost a year ago." So they're starting to jump back in on some of the ones with the best balance sheets. So there are some that aren't as good as others, but there are definitely some excellent values out there in the MLP space.

Steve McDonald: I think something that's driving the entire market - what I've noticed recently - is that oil, or the market is detaching from oil prices. We sold off by 10% recently, and the market didn't go down. If we had dropped 10% on the price of oil six, nine months ago, this thing would have been off 1,200 points.

Dave Fessler: We used to be able to predict what the market was going to do on any given day by looking at oil prices. Now you can't.

Steve McDonald: That's been going on for nine months. That has broken this. When you add in all of the fundamentals that Alex talked about - I have been saying for some time I think we're going to hit more new highs this fall. I think we could see 2,250. That's only 5% more on the S&P.

My biggest concern is that the little guy is going to see this as a huge buying opportunity and it's not. It's not a huge buying opportunity. There's still some good buys out there now, but, boy, once this thing starts hitting close to 20,000, excitement really builds. The guys on CNBC, "and they're breathless and they're covering and this is running up and this is doing that." It's like, uh-oh. Time to go to cash, which we don't do, of course. Not completely, but anyway. Last comments.

Marc Lichtenfeld: Well, I think one interesting thing, an issue I'm grappling with, is the disconnect between the stock market and bond yields. Typically, if the stock market's going higher, it should mean the economy's going well and bond yields should be climbing, but we're getting the opposite. Stocks are hitting new highs and bond yields are hitting record lows. I'm trying to decipher what that means because markets typically are forward-looking mechanisms. Very often you look at the stock market and say, okay, it should mean the economy's going higher if the stock market's going higher.

Steve McDonald: It's international buying in our market. That's what it is, because there's tons and tons of money looking for a place to go. You have the choice of a negative yield in the EU, no yield in Japan or come here and get some yield. I think it's all international buying.

Marc Lichtenfeld: It's a valid point. It very well could be.

Steve McDonald: Dave, it's up to you.

Dave Fessler: I think, not just in the energy sector, but even in technology. Some of the innovative things that are happening in the automotive industry, there are some disruptive companies out there, whether it be Amazon.com (Nasdaq: AMZN) or, just to go to another extreme, Mobileye (NYSE: MBLY), which makes some of the chips for autonomous driving software. These companies are totally disrupting the industries that they're in, and those are always going to be good investments, I think.

Steve McDonald: Mobileye. Still affordable?

Dave Fessler: Yes, it is. It's a growth stock, so it's got a little bit high of a P/E, but it's a great company.

Steve McDonald: Alex, take us home.

Alex Green: I was just going to say you mentioned that when the Dow hits 20,000 that it might be time to start packing it in, but from these levels you're only talking about 6% or so and you're there.

Steve McDonald: Yeah, it's not huge.

Alex Green: That big round number may be here before anybody really suspects.

Steve McDonald: Thank you so much, guys. Another great session. I really appreciate it.

Marc Lichtenfeld: My pleasure.

Dave Fessler: Our pleasure.

Alex Green: My pleasure.

Steve McDonald: My pleasure. For everybody here in Stowe, Vermont, it's unbelievable. It's so beautiful here. I wish you guys could have come along. I'm Steve McDonald. Thanks so much for being a part of this. We'll see you from Chicago in September, right? Is that our next trip?

Alex Green: Yeah.

Steve McDonald: Chicago in September. You might want to come along. Great food in Chicago.

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