Author: Ben Dickey, BSG&L Financial Services LLC
Covestor models: Pure Growth and Growth Plus Income
Disclosure: Long SDRL, CAT, TGP, BTU, CLF, FCX, LINE, KMP, UTX, EMR
The third quarter of 2011 was not a good one for investors. Fear about European debt and a slowing in emerging markets sparked real fears of a global recession. As a result, the markets sold off steeply in the quarter.
One of the concerns investors have is that government policies will have a dramatic impact on the global economy. This causes uncertainty. It is difficult to predict what governments will do and more importantly, whether it will work. I do not believe that the international banking system will allow a financial lock up like 2008. Many of the problems are similar, including the huge amounts of debt. However, the difference this time is that this is sovereign debt, as opposed to private debt in 2008.
I have discussed the sovereign debt problems with the PIGS in previous market commentaries. I believe the markets have over-corrected. The markets have dropped to a point that they are pricing in a belief that all of these countries are as bad off as Greece. Several of the other countries have already taken steps to correct their problems.
Oil has risen from a low in the low seventies per barrel to the low nineties (WTI). Copper fell to the low $3/pound and has risen back to the high threes in the last 30 days. As the world economies expand, slowly in the U.S. and slower in Europe, the emerging markets are growing at a much higher rate. The phenomenon of the growing middle class in the developing markets continues.
Saudi Arabia has not been able to meet its 10MM bbl/day commitment, shipping around 9.5MM bbl/day. The International Energy Agency stated that the Non OPEC producing countries will not increase production in 2012. These items continue 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 current dividend rate of over 9% and Knightsbridge Tankers (VLCCF) which transports oil and currently has a dividend yield in excess of 9% as well.
In addition, I feel that the Oil Service companies are poised for significant gains in the last part of the year. Cameron International (CAM), Schlumberger Limited (SLB), and Helmerich & Payne (HP) are good plays. The huge oil finds in the Bakken and Eagle Ford Shale plays will likely 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 a 7% 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) because of the anticipated increases in shipments of coal, copper and iron ore to meet the higher 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 are drawn to Penn Virginia Resources (PVR), Linn Energy (LINE), and Kinder Morgan Partners (KPM). Even if it takes a little longer for the higher equity values to be recognized, these investments are currently paying a dividend of between 7% and 9% as of 11/1/11.
The manufacturing sector for industrial products has shown good earnings growth. The majority of industrial companies that have reported third quarter results have beaten forecast and many have raised guidance. In this area, we like Honeywell (HON), United Technology (UT), Emerson Electric (EMR), and Cummings Inc. (CMI), as well as the aforementioned Caterpillar (CAT).
We believe investors should not let a market fear deter them from staying with producers that supply the developing world, and that the recent panic presented a good buying opportunity. We are in a secular growth period for both hard and soft commodities. However, market volatility could be high over the next few months. 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. These producing companies can prosper without the U.S. economy expanding.
We look at longer term ideas at BSG&L Financial Services. Over the last year, that has served us well. Investors should try not to focus on the short term indicators which we feel will only confuse them and lead them to make incorrect decisions about their investment holdings. We believe we are on the right track by having a longer term perspective with our investment ideas.
Ben Dickey CFP/MBA
