Author: Ben Dickey, BSG&L Financial Services LLC
Covestor model: Pure Growth and Growth Plus Income
Disclosures: Long SDRL, VLCCF, CAT, JOYG, TGP, BTU, SCCO, FCX, CLF
The US economy has dramatically slowed in the last four to five months. With the first quarter being revised down to 0.4% growth and the preliminary estimate for the second quarter coming in at 1.3%, the economy is close to stalling (BEA, 8/26/11 release http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm). I stated last month (https://investing.interactiveadvisors.com/?p=11226) that the US economy will probably stay slow but still expand at an annual rate of about 2%. Due to the recently released statistics, I now think that the growth rate for the overall economy will be slowing to between 1 ½% to 2%.
Manufacturing is still the one bright spot in the economy, but the latest PMI Index shows it has also been slowing over the last few months. The most recent PMI Manufacturing reading (ISM, 9/1/11 http://www.ism.ws/ismreport/mfgrob.cfm) was down slightly, to about 50.6, which is still showing expansion, but at a slowing rate. The parts shortage from Japan caused by the earthquake and tsunami is beginning to ease, which resulted in automotive production expanding in August. Otherwise the slowing would have been worse. Although manufacturing has slowed down, manufacturers’ profit margins have remained stable as commodity costs have eased.
Europe is still in the doldrums due to the overhang of all the sovereign debt problems. The slim one month LIBOR vs. one month Treasuries spread his tells me that the central banks of Europe are backstopping the commercial banks. However, the German people are growing tired of supporting the remainder of Europe. France showed zero increase in second quarter GDP, and Germany is barely expanding. The one bright spot is the developing countries, which are still growing. Their growth has slowed down, but India, China and Brazil are still expanding at a good pace. Indonesia is also growing very well, as are the smaller Asian and African countries.
Oil prices have been very volatile. Even at these historically elevated prices, we still think that the demand for oil will continue. The International Energy Agency lowered their forecast for increased production from Non-OPEC countries for 2012. Saudi Arabia has not been able to meet its 10MM bbl/day commitment, shipping less than that amount recently. This continues to convince me that Brent Oil Prices will average $125/bbl over the rest of this year and move higher next year. (“IEA Says Economy Risks May Cut 2012 Oil Demand Growth By 60%” Bloomberg, 8/10/11
Several investment ideas related to that continuing demand would be SeaDrill Ltd. (SDRL), the Norwegian deep water driller, and Knightsbridge Tankers (VLCCF) which transports oil. As of 9/2/11, both stocks have attractive dividend yields. In addition, I feel that the Oil Service companies are poised for significant gains in the last half of the year. Cameron International (CAM), Schlumberger Limited (SLB), and Helmerich & Payne (HP) are attractive stocks in this sector.
We also believe that the worldwide recovery in industrial production should 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. We are increasing our positions in companies such as Caterpillar (CAT) and Joy Global (JOYG), which are both deeply involved in mining operations. We are also buying Teekay LNG Partners (TGP) which has an attractive dividend, but should also benefit from the worldwide demand to reposition LNG product.
We like Peabody Energy Corp (BTU), Southern Copper (SCCO), Freeport McMoran (FCX) and Cliffs Natural Resources (CLF) due to the anticipated increases in shipments of coal, copper and iron ore to meet higher worldwide demand.
Based on our views of the demand for all types of energy commodities, we also like high dividend payers Penn Virginia Resources (PVR), Linn Energy (LINE), and Kinder Morgan Partners (KPM).
The Manufacturing Sector for Industrial products has shown good earnings growth. We like Honeywell (HON), United Technology (UT), Emerson Electric (EMR), and Cummings Inc (CMI), as well as the aforementioned Caterpillar (CAT).
We will not let a market correction deter us from buying stock of 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, a large portion of the developing world greatly expanded its income, raising demand for better housing, better food and a better life. These producing companies are able to prosper without the US economy expanding.
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 with this investment approach.
