Author: Ben Dickey, BSG&L Financial Services LLC
Covestor model: Pure Growth and Growth Plus Income
Disclosures: None
The US economy dramatically slowed in the last quarter. With the first quarter of 2011 being revised down to 0.4% growth, the economy is close to stalling.
I still believe that the US economy will stay slow, but it will still expand at an annual rate of about 2%. Manufacturing had been the one bright spot in the economy, but the latest PMI Index (as of 8/1) shows slowing recently. I still believe a dramatic parts shortage from Japan caused by the earthquake and tsunami and higher commodity costs are the cause of the slowing in manufacturing. This should ease over the next few months as Japanese manufacturers come back on line.
The United States averted a financial shock by finally agreeing on a debt compromise. Europe is still in the doldrums due to the overhang of all the sovereign debt problems. The recent LIBOR/Treasuries spread 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. Indonesia is also growing very well, as well as the smaller Asian and African countries.
Oil prices recovered after the debt news with Brent moving higher. Even at these elevated prices, we still think that the demand for oil will continue. Several investment ideas related to that demand would be SeaDrill Ltd. (NYSE: SDRL), the Norwegian deep water driller with a high dividend yield, and Knightsbridge Tankers (NASDAQ: VLCCF) which transports oil and has a high current dividend as well.
I believe the oil service companies are poised for significant gains in the second half of the year. Cameron International (NYSE: CAM), Schlumberger Limited (NYSE: SLB), and Helmerich & Payne (NYSE: HP) are attractive stocks in this sector.
We also believe that the worldwide recovery in industrial production should also lead to an increase in demand for coal, iron ore, and liquefied natural gas (LNG). We are buying stocks that should benefit from this increased demand, such as 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) which has a strong dividend but should also benefit from the worldwide demand to reposition LNG product.
We like Peabody Energy Corp (NYSE: BTU), Southern Copper (NYSE: SCCO), Freeport McMoran (NYSE: FCX) and Cliffs Natural Resources (NYSE: CLF) because of the anticipated increases in shipments of coal, copper and iron ore to meet the higher demand.
Based on our views of the demand for all types of petroleum commodities, we also like high yielding Penn Virginia Resources (NYSE: PVR), Linn Energy (NASDAQ: LINE), and Kinder Morgan Partners (NYSE: KMP).
The manufacturing sector for industrial products has shown good earnings growth. We like Honeywell (NYSE: HON), United Technology (NYSE: UTX), Emerson Electric (NYSE: EMR), and Cummings Inc (NYSE: CMI), as well as the aforementioned Caterpillar.
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.
We look at longer term ideas at BSG&L Financial Services. We try not to look at short term indications, and we believe we are on the right track.
Ben Dickey CFP/MBA
Sources:
BEA report, 7/29. http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
Institute for Supply Management, 8/1. http://www.ism.ws/ismreport/mfgrob.cfm
