The Federal Reserve surprised the financial markets by not tapering rates at the September meeting. It also announced that future consideration would be data dependent. This is a cloaked way of saying “We will taper when we want to.”
With the government shutdown and a very sluggish economy, I believe the central bank is afraid to stop buying bonds. August durable and capital goods orders, which only inched up, were released last week. Durable goods ex-transportation saw a decline.
This is troubling because August auto sales were strong. The latest revision to second quarter GDP was unchanged at 2.5%. Most economists are forecasting a 1.5% to 1.8% growth rate for GDP for the third quarter. With a 1.8% rate for the first quarter, 2.5% for the second quarter and the possibility of 1.8% for the third quarter, the U.S. economy in my opinion is close to stall speed.
However, having said all this, there are always bright spots. Home prices are still climbing. The recent rise in interest rates has slowed the rate of growth in housing, but has not derailed it. Energy prices are still relatively low and manufacturing and energy companies are adding highly paid personnel.
U.S. crude production rose 20.3% year over year in August. Year over year increases have been higher for 23 straight months. North Dakota oil production is also strong.
Overseas there are improvements. Spain has recently emerged from two years of recession. Borrowing cost for Spain and others on the weak side of the Euro zone have fallen over the past year and the bloc saw tepid economic growth in the second quarter.
As the U.S. economy recovers and the international markets improve, American companies are well positioned to supply products to the world market. Globally, energy consumption has been slow to increase during the economic slowdown. When consumption returns to historic levels, and as this demand drives prices higher, the U.S. economy’s ability to produce less expensive domestic energy will become an even larger advantage for U.S. companies.
As I stated previously, our domestic production increases have more than offset the decline in other producing areas. The proliferation of energy production from tight shale plays is providing the opportunity for U. S. companies to benefit from a lower energy cost as well as lower raw material cost. In addition, industrial companies have also grown rapidly over the last year. With their advantage in the cost of energy, this growth should continue.
Some of the industrial company names are Honeywell (HON), United Technology (UTX), Emerson Electric (EMR) and Rockwell Automation (ROC). Each of these companies have shown good year over year earnings growth as well as increased share prices. I also added Whirlpool (WHR) to my industrial mix.
I have added to our positions in Kinder Morgan Partners (KMP). We have also added High Crush Partners (HCLP) to our mix. HCLP has a yield of over 9% and with their recent acquisitions they should be able to potentially increase their dividend.
We are adding to several of our positions in the energy sector. We continue to like EOG (EOG), Continental Resources (CLR), Oasis Petroleum (OAS) and Whiting Petroleum (WLL). We have also added a pure play on the Eagle Ford shale formation, Sanchez Petroleum Corp (SN). They are dramatically increasing their production.
Just to restate, I believe the economy is expanding in spite of the previously mentioned problems. That is why we are emphasizing investments in companies with good cash flow, good cash distributions and companies that operate in areas where they have a competitive advantage due to much lower energy costs and raw material input costs.
I prefer companies that generate good after tax returns. With interest rates at historic lows, even as dividend taxes go up, the after tax returns are still higher than most investment grade debt. There is a growing shift from very low yield bonds into equity. BSG&L is a long term investor. I believe if you are patient, build cash and buy good companies on pull backs, your portfolio may have good growth over the long term.
The investments discussed are held in client accounts as of September 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
