Getting ready for the oil rebound

The US economy is expanding, but at a sluggish pace. The latest revision to fourth quarter gross domestic product came in at 2.2%.

Exports were lower due to sluggish expansion overseas and the strong dollar reduced US export competitiveness.

Additionally, productivity is expanding at a rate not seen since the 1970’s and businesses are adding capital at a very slow pace.


Job Growth

GDP growth is determined by two factors: growth in the labor force and productivity growth.

The labor force participation rate has dropped to a level not seen for several decades. Combined with lower capital spending our GDP is growing, but at a moderate rate.

This current year is starting off more positive with the better-than-expected job growth in February, when the economy added 295,000 jobs.

This increase adds pressure on the Federal Reserve to increase interest rates in my opinion. In my view, they should hold off because of the strength of our currency.

Eurozone Recovery

The European Central Bank recently began purchases of sovereign bonds from a previously-announced quantitative easing program in a bid to lower interest rates.

A weaker currency and lower oil prices is beginning to help Europe’s economy improve. For the first time since 2007, the European Commission expects every country in the European zone to show positive economic growth in 2015.

In addition, the Indian government has implemented changes to improve their economic performance and its economic growth is forecast by the IMF to exceed that of China for the first time in decades.

China’s growth is slowing, but to a still reasonable 7% range. These two most populous countries in the world will create demand for materials, energy, food, and many other items in my view.

American Consumer

As for U.S. household spending,  lower gasoline prices and pay increases that are now exceeding inflation are beginning to show up in consumer’s pockets.

So far, consumers seem to be using this new cash to pay down debt and to increase spending in areas such as home improvement, entertainment, and better quality of groceries, according to my research U.S. consumer spending data.

A brutal winter hit consumer confidence in January. Also, Institute for Supply Management lowered its top line purchasing manager’s index from 53.5 in January to 52.9 in February.

Over half of this drop can be attributed to the West Coast port labor-related slow down. This should rebound as this is resolved.  Any number above 50 still indicates expansion.

Energy Prices

West Texas Intermediate oil prices have traded in a narrow range around $50 for several weeks since the bottom in the mid $44 range.

Baker Hughes (BHI) has idled rigs in recent weeks. announced that more rigs were idled last week.

However, oil production is staying relatively constant.  In my opinion, producers have concentrated their efforts in their better leases and are becoming more efficient at producing oil per well.

On the negative side, ISIS sponsored extremists have attacked oil fields in Libya reducing output and made strides in Nigeria.

Global Demand

However, there remains solid upward pressure on oil prices.

The International Energy Agency (IEA) data show a steady increase in demand while U.S. refineries are operating at less than full capacity thanks to labor tensions.

In my opinion, oil prices will start to rise eventually. That’s why I’m adding to our positions in my Growth Plus Income portfolio, particularly in Linn Energy (LINE), EOG Resources (EOG), ConocoPhillips (COP) and Concho Resources (CXO).

In the natural gas sector, I continue to like Gastar (GST) and Range Resources (RRC).  Among mid-stream players, I plan to keep my position in Enterprise Products Partners (EPD) and Kinder Morgan (KMI).


Portfolio Holdings

Based on my analysis of improved consumer spending, I have added Kroger (KR), Walt Disney (DIS), and Home Depot (HD) to our list of favorite positions.

In my opinion, these are companies that may benefit as the lower gas prices and higher wages flow thru to the consumer.

We are not adding new money to our industrials positions at this time, but we are not selling out of them either.

These companies are holding up fairly well in spite of the strong dollar in my view.

They include: Honeywell (HON), United Technologies (UTX), Emerson Electric (EMR), Rockwell Automation (ROK), Westlake Chemicals (WLK), and LyondellBasell (LYB) are the names we like here.

Photo Credit: Tsuda via Flickr Creative Commons

The investments discussed are held in client accounts as of March 24, 2015. 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.