Manufacturing is the one bright spot in this slowing economy – BSG&L (SDRL, CAT, JOYG)

BSG&L FinancialAuthor: Ben Dickey, BSG& L Financial Services LLC

Covestor model: Pure Growth and Growth Plus Income


The US economy is slowing. My belief is that the US economy will stay slow and will expand at an annual rate of about 2%. Manufacturing has been the one bright spot. The slowing over the last few months has been due to a dramatic parts shortage from Japan. This should ease over the next few months, as Japanese manufacturers come back on line. Europe is even slower than the US due to the overhang of all the sovereign debt problems.  So far, yields on one month LIBOR have stayed relatively close to yields on one month Treasuries.

This tells me that the central banks of Europe are backstopping the commercial banks. However, the German people are growing tired of supporting the also-ran’s. The one bright spot is the developing countries, which are still growing. Even though India, China and Brazil have slowed, they are still growing at a good pace.

The key question on investors’ minds right now is “What will happen in the Middle East”?  WTI prices shot up late last month, as did Brent crude.  I believe this is based on fear of the unknown and that prices will slowly pull back.  I still believe however, that, due to overall world demand, oil prices will stay around $100.00/barrel in the first half of 2011.

Even at these elevated prices, we still think that the demand for oil will continue and several investment ideas related to that demand would be SeaDrill Ltd. (NYSE: SDRL), the Norwegian deep water driller that has a high dividend, and Knightsbridge Tankers (NASDAQ: VLCCF) that transports oil and currently has likewise offers a high dividend yield.

The earthquake and tsunami in Japan will slow production in the short run, but will add to the world’s demand for coal, iron ore, and liquefied natural gas (LNG). We are buying stocks that help produce these commodities, like Caterpillar (NYSE: CAT) and Joy Global (NASDAQ: JOYG), which are both deeply involved in mining operations. We are also buying Teekay LNG Partners (NYSE: TGP) with a high dividend, as well as the commodity trusts that gain from increased prices and increased shipments of coal, Peabody Energy Corp (NYSE: BTU) and iron ore, Cliffs Natural Resources (NYSE: CLF).

Based on our views of the demand for all commodities (including agricultural commodities) over the next couple of years, we are also buying Penn Virginia Resources (NYSE: PVR), Freeport McMoran (NYSE: FCX), Southern Copper (NYSE: SCCO) and Deere & Co (NYSE: DE).  We continue to like the natural gas and liquids transporters such as Linn Energy (NASDAQ: LINE), and Kinder Morgan Partners (NYSE: KMP). These investments all pay relatively high dividends.

In other sectors of the economy, we like Honeywell (NYSE: HON), United Technology (NYSE: UTX) and Emerson Electric (NYSE: EMR).

We do not intend to let a market correction deter us from staying with producers that supply the developing world. I believe we are in a secular growth period for both hard and soft commodities. Developing economies are consuming large quantities of better food and materials for economic expansion. In the last ten years, two billion people worldwide have doubled their income. They seem to be steady in their demand for better housing, better food and a better life.

We look at longer term ideas at BSG&L Financial Services. Over the last year, our Covestor models have done well – both significantly outpacing the S&P 500. We try not to look at short term indications, and we believe we are on the right track.

Ben Dickey CFP/MBA