Over the last three years, the first quarter GDP numbers have been terrible. This year was no exception.
Originally announced at a 0.2% gain, it was revised downward to a 0.7% loss.
The economy is growing at a rate which cannot handle small setbacks such as cold weather, a dock strike on the West Coast or lower than expected job gains.
Fragile
The first quarter stumble was one of three negative quarters since the recovery began in 2009. The last time that happened was in the 1950s.
One of the reasons we have had much slower growth in this expansion is the very low rate of productivity gains.
Output gains from U.S. workers fell in the first quarter underscoring the GDP loss. Productivity fell at a 1.6% rate in the first quarter. This is concerning because productivity gains have been very weak over the entire expansion.
Productivity Slump
The first quarter drop in productivity followed a fourth quarter loss, marking two consecutive quarters of reduction. That is the first time this has happened since 2006.
The anemic productivity growth during the expansion can be partially attributable to a lack of business investment. With the collapse in oil prices, oil and gas companies have greatly reduced capital expenditures.
The oil and gas industry, along with the chemical industry have supplied the majority of the capital employed over the last six or seven years. Now the chemical industry is the last man standing.
Dollar Tumbles
As the dollar pulls back, commodities in general are showing signs of life. Copper, oil and agricultural commodities are showing signs of price increases.
Oil prices now have moved back up past the $50 hurdle and are trading in a narrow range between $58 and $62.
We are staying with companies that have strong balance sheets and are not over leveraged.
Energy Plays
In this arena we like Linn Energy (LINE), EOG Resources (EOG), ConocoPhillips (COP) and Concho Resources (CXO).
These are very efficient producers who are profitable at today’s prices and can be even more profitable as prices rise.
For natural gas, we like Gastar (GST) and Range Resources (RRC).
These producers are profitable at today’s prices and as the chemical industry’s new plant construction comes online this year and next year, the price these companies receive for natural gas liquids (NGL’s) should increase.
Several mid-stream companies we follow are building capacity to take advantage of the domestic expansion in production and demand in the NGL space.
Mid-Streams
Our two favorite names in this space are Enterprise Products Partners (EPD) and Kinder Morgan (KMI). Enterprise Products has expanded its presence in the EagleFord by acquiring EFS midstream.
They have joined Kinder Morgan in acquiring what we believe are high-quality mid-stream companies at very reasonable prices.
Companies that derive income from overseas have been hurt by the strong dollar. However, companies that are domestically orientated have done well.
Consumer Sector
For this reason we are adding to our positions in several companies that we think are showing good growth in the consumer sector.
The names we like are Kroger (KR), Walt Disney (DIS), Home Depot (HD) and Whirlpool (WHR).
These are companies that can benefit as the consumer starts to reaccelerate their spending after having paid down their debt balances.
We are also starting to acquire small positions in Skyworks Solutions (SWKS), a technology company and Wells Fargo (WFC) in the financial sector.
Industrials
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.
Honeywell (HON), United Technologies (UTX), Emerson Electric (EMR) and Rockwell Automation (ROK) are the ones we like.
However, in the chemical industry, Westlake Chemicals (WLK) and LyondellBasell (LYB) are showing good first quarter profit gains on a year-over-year basis.
Their capital expansion projects are beginning to come on line allowing them to further reduce their unit costs. We are beginning to add to these positions.
Photo Credit: Tsuda via Flickr Creative Commons
Some of the investments discussed are held in client accounts as of June 26, 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.
Some investments discussed in this presentation are for illustrative purposes only and there is no assurance that any manager will make any investments with the same or similar characteristics as any investments presented. The investments are presented for discussion purposes only and are not a reliable indicator of the performance or investment profile of any composite or client account. Further, the reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions made by model managers in the future will be profitable.
