Author: Ben Dickey, BSG&L Financial Services LLC
Covestor model: Pure Growth and Growth Plus Income
Disclosure: Long SDRL, CAT, TGP, BTU, CLF, FCX, LINE, KMP, UTX, EMR
The US economy has dramatically slowed since the beginning of the year. With the first quarter being revised down to just 0.4% growth and the preliminary estimate for the second quarter coming in at 1.3%, the economy is close to stalling. The Federal Reserve and most private economists have lowered their estimate for the year to about 2% growth.
In addition, the Federal Reserve has instituted its “Operation Twist” policy of selling short term Treasuries while buying the same amount of long term Treasuries in an attempt to lower long term rates even further.
I stated several months ago that the U.S. economy will probably stay slow but it will still expand at an annual rate of about the 2% range. Because of recent 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. The latest PMI Index shows manufacturing activity has expanded . The parts shortage from Japan caused by the earthquake and tsunami is beginning to ease, which resulted in automotive production expanding in August and again in September. In addition, the latest government report shows construction to have expanded.
The situation in Europe is getting worse due to the overhang of all the sovereign debt problems.Yet so far, one month LIBOR is still about the normal rate above 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 remainder of Europe. France showed zero increase in second quarter GDP and Germany was barely expanding.
The one bright spot is the developing countries, which are still growing. Though their growth has slowed down, India, China and Brazil are still expanding at a good pace. Indonesia is also growing very well, as well as the smaller Asian and African countries. Inflation has slowed a small amount and Brazil lowered interest rates. I also believe China will achieve a soft landing. Caterpillar announced its dealers are experiencing growth in orders.
Oil prices have been very volatile, with West Texas Intermediate (WTI) prices sinking to around $80/bbl before increasing back to near $88/bbl at the beginning of September. Recent prices have dropped into the high seventy dollar range. I think this is oversold and prices will began their upward drift as Heating Oil use increases toward the winter in the northern hemisphere.
The International Energy Agency lowered their forecast for increased production from Non-OPEC countries to essentially no gain for 2012. Saudi Arabia has not been able to meet its 10MM bbl/day commitment, shipping around 9.5MM bbl/day. This continues to convince me that Brent Oil Prices will average $125/bbl over the rest of this year and move higher next year.
Several investment ideas related to that continuing demand would be SeaDrill Ltd. (SDRL), the Norwegian deep water driller that has a dividend yield of over 10% as of 10/3 and Knightsbridge Tankers (VLCCF) which transports oil and currently has a dividend yield in excess of 10% as well. 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 compelling stocks in my view. The huge oil finds in the Bakken and Eagle Ford shale plays should benefit the services companies.
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. These companies all sold off in the most recent market pullback, giving investors a chance to buy very good companies that produce a large percentage of their income from expanding markets overseas.
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). Even if it takes a little longer for higher equity values to be recognized, these investments are currently paying compelling dividends.
The Manufacturing Sector for Industrial products has shown good earnings growth. The last quarter showed an 18% Year over Year growth in earnings. 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 U.S. 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.
