JPMorgan's Caffrey: Why I'm Bullish on Energy Stocks

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Aug. 21 (Bloomberg) -- JPMorgan's Jack Caffrey discusses his investment strategy and the outlook for energy stocks on "In The Loop." (Source: Bloomberg)

Private bank.

Opportunities stemming from management changes.

What do you think about hertz?

This story has had a lot of volatility around it.

You have had challenges with respect to concerns around accounting issues in the past.

Depreciation for cars.

It is interesting to see people continuing to look at this.

If you went to your global equities portfolio manager, to your boss, and said the results i have given you the last three years, i'm not sure about those anymore and i can't tell you how well i have done in the first or second quarter, what would your bosses say to you?

It would be a short conversation.

[laughter] how is this guy still in a job?

That is that i am wondering.

How was the stock up 10%? because people are hoping that he is leaving.

One of the investors with a 3% stake said it is time for him to go.

And carl icahn just bought a 10% stake.

When i look at what is going on -- when i look at what his gallant -- has gone on, i look at employment claims and gdp.

You are trying to find companies where an outside investor is putting pressure on it.

You are looking at management teams.

You are looking at the potential for a spin off.

What if you are not successful?

A lot of people said time warner and 21st century fox was going to happen.

It did not go through.

It could come back.

When you think about events, you can participate in announced events.

You are looking at classic arbitrage.

You have something with greater certainty.

When you play potential arbitrage, you are up 20% if you are right and if you're wrong, you are down 15%. how many times can you be wrong and still have a job?

That is where event are not necessarily clean or easy.

That is where hopefully you look to someone who can try to handicap it.

Are you functioning like an arm trader?

We have generally been more interested in spinoffs and in a management team that has left.

We are interested where they are trying to bring in new management teams or reposition value within.

Classic arbitrage is a messy story, were you are participating in deals and you are saying, if i'm right i make x and if i am wrong i make three times acts.

-- three times x. ben graham outlined this approach.

One company that had a huge spin off this week spun off a $15 billion company.

This brings me to the point that you are interested in energy.

It is a popular play.

A lot of guests on the show like energy stocks right now.

The chart you see on the screen shows that energy prices in the face of all of this geopolitical risk in iraq and ukraine and libya, they have still fallen and that is a fundamental part of the equation.

Doesn't the fact that energy prices are falling make you question your commitment?

What has really been one of the big drivers to the recovery has been energy companies.

Now energy companies want to do less spending so that they are becoming much more disciplined.

Looking at cutting capital spending and driving different returns differently.

Energy prices matter.

You also start thinking about, can i return the cash to shareholders?

You bring up energy and you look at the international troubles we are facing right now and all of the turmoil.

It is pretty amazing that the market has not seen more of an effect.

That's right.

You would think.

And in equities.

Step back.

You have seen a massive shift in where the incremental oil value came from.

We have gone from a world where opec was the only place for spare capacity and now texas become spare capacity.

That is domestic supply that will affect the price but -- not affect the price of brent.

True.

Shameless plug.

We are going to be talking about these things in "market makers." let me talk you about the international tour mile we have seen.

-- let me talk to you about the international turmoil we have seen.

People are creeped out by iraq, israel, ukraine, ferguson, hertz . there are a lot of problems out there.

You do not see it reflected in equity prices.

A big chunk of investing is what is the best relative use of a dollar?

When i look at a 10-year treasury, when i look at a german bund yielding under 1% and i look at where inflation rates are, i say, i'm not getting paid much in terms of your term returns in fixed income.

The reason why those interest rates are so low is that people are so freaked out that they keep driving themselves into those vehicles.

You could argue you are getting freaked out.

Germany is not growing again.

Their reported gdp last week.

To some extent, there is a constant interplay of what we are going to talk about the news on the front page and that is painful, that is horrible for the people involved, but then you have to step back and reflect.

Does this affect the general trajectory of her earnings as something as large as the european union?

Does it reflect the earnings of the united states?

We are coming up on the break.

Thank you so much.

Thank you guys.

I will see you in a little bit.

All day long.

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